Sir, your report that Asda has moved ahead of Sainsbury's to become the UK's second largest supermarket behind Tesco (the Grocer, August 2), has raised a few questions in my mind. Notably, I considered what the implications would be of having two retailers who differentiate on price in the number one and two positions.
Conventional wisdom says that equilibrium in an industry is achieved when there is a balance between price leaders and quality or service differentiators in the top market share positions. When the top competitors are competing on the same differentiator it can create instability, as the war for consumers is a direct battle rather than a more comfortable sparring relationship.
Where both leaders compete on price, this can lead to price wars that damage the industry up and down the value chain.
Add to this the recent history of the leading retailers stripping costs out of their businesses and supplier prices year-on-year and you have potential for wider economic hardship. I suggest that the retailers have already reached the bottom of the barrel in stripping out costs. Yet Asda's rise to number two could again accelerate this process. The cost may prove much higher than we realise, especially if Asda wins in the battle for Safeway and achieves a size comparable to Tesco.
Asda's move to number two retailer signals a new round of change in the British retail industry and the outcome of the Safeway ruling could magnify the effects.
