Focus: The phoney price war

The Americans are here and the gloves are off. But is Asda's latest cost-cutting campaign, under the new ownership of the US retailing giant Wal-Mart, really the beginning of an all-out supermarket price war that will benefit the customers? Or is it just another tactic to enable the big stores to reap even more profits?

Last week saw Asda slash pounds 30m off our shopping bills. Its 600 price cuts, which include 100 of the most famous brands, from Nescafe to Coca-Cola, were promoted as saving the average family pounds 300 on its yearly grocery bill. The cuts are the latest attempt at aggressive pricing since Wal- Mart took over the Asda chain in July, and follow the company's Rollback campaign which aims to discount prices this year by pounds 200m.

Our survey of prices in the big four supermarkets - Asda, Tesco, Sainsbury and Safeway - in one of Britain's most prosperous towns, Reading, Berkshire, showed that Asda's prices were indeed cheaper. We picked a typical basket of fresh and convenience foods and household goods, coming to a little over pounds 40 in each case, and found that the store beat its nearest rival, Safeway, by 79p.

However, it was also clear that costs are exactly the same for many goods. Prices for apples, onions, tomatoes, Nescafe coffee, orange juice, Kellogg's cornflakes and Stella Artois beer, matched in all four supermarkets despite the retail industry's insistence that they are set locally according to labour and location costs. Last week the Trade and Industry Secretary, Stephen Byers, announced that fines for companies found guilty of price fixing would be tripled, but the supermarkets insist they are in a period of intense competition, which is why prices on many items are so close.

So confident is Asda of the importance of price to shoppers that it has ditched that holy grail of Nineties retail marketing, the loyalty card, in favour of price cuts. Its research showed that customers preferred lower prices to promotional offers. Meanwhile, the other big supermarket players have hit back with pledges of similar cuts in the cost of goods. Safeway entered the fray with its Price Cut 99 campaign, on which it is spending pounds 30m, while Tesco remarked sniffily: "Whatever others claim to do, we will better."

But when one remembers that a large supermarket sells more than 55,000 lines, price cuts on a couple of hundred items seem less dramatic.

But they do highlight just how continuous competition has become in the retailing world. Yet shoppers do not seem to have benefited. The stores have been under fire from the Office of Fair Trading which last year found that profit margins in this country were three times what they were on the Continent. And according to Mike Godliman, of the retail analysts Verdict, margins are still almost three times higher in Britain than Europe, although they are beginning to fall and stores are not making "exorbitant profits", given their size.

We compared prices in British, French and German supermarkets and found substantial differences in price. A basket of 20 standard household items, including milk, fruit and vegetables, cornflakes and household goods, cost 26.62 euros (pounds 41.23) in Reading's Asda, but in the Kaiser supermarket, Berlin, the same goods cost 25 euros, and in Auchan in Calais we were charged just 18.75 euros.

So why are we paying so much more than our continental neighbours? The big retailers maintain that they have to pay more for fuel, distribution and land in Britain. But time may be running out for them. Stephen Byers is monitoring Britain's grocers: he plans to compare prices on up to 100 product lines with those in Europe.

American prices are even lower. Take bananas: in the four Reading supermarkets we surveyed, they cost 45p per lb; in the US they cost 43p. The same is true of eggs. In Reading they cost between 79p and 85p; in America, 56p. A two-litre bottle of Diet Coke is pounds 1.29 in Tesco, Sainsbury and Safeway, and 4p cheaper in Asda. But that's still 20p more than you would pay in downtown Chicago.

No wonder shoppers are no longer as seduced by the lure of price cuts as supermarkets believe. According to the market research company Research International, we have all become far more cynical about the attempts by stores to buy our loyalty. Its latest survey showed that more than half of shoppers questioned felt they were being ripped off on basic food and groceries, with three-quarters believing it would be cheaper to shop abroad. Promotions simply make people think that margins are so high the stores can afford to cut costs, says the company's retail specialist Iona Carter.

Last week shoppers at the major supermarkets in Reading were yet to be convinced that lower prices would be of real benefit to them.

Alan Fossett, a father of three, considered sweeping price reductions long overdue. "The supermarkets are always taking off one or two pence but we are probably being ripped off because they can afford to give us a better deal."

Tesco was offering "Even More Price Cuts" but Debbie Grech, a mother of three young children and regular Sainsbury shopper ("because it's closer"), couldn't tell the difference. Like the shoppers questioned at Sainsbury, Safeway and even Asda, she was unimpressed by the quality of food at Asda.

It is obviously going to take a little time and a lot more price cuts to make a serious impact on customer habits. Asda is making a lot of noise but if, as is predicted, Wal-Mart opts for its biggest reductions on non- food items, loyalty will have to be built up in ways that encourage consumers to return for regular shopping. That could mean taking another look at quality.

One school of thought is that the stores will continue their policy of keeping prices of known value items such as bread and milk down, while building in hidden costs to other items such as take-away meals, which customers tend not to compare.

But the editor of The Grocer, Clive Beddall, is convinced that this time the threats are real.

"The propaganda war started this week as British chains finally got some attitude and responded to the Wal-Mart effect," he says.

If Wal-Mart is going to draw on its pot of gold back home, he cautions, we could be in for "the mother of all price wars".