The End to Competition Between Major UK Supermarkets?

(by Morten Hviid) ASDA’s new price promise appears to ensure customers get the best deal, but may actually result in less competition between supermarkets. On Wednesday the 28th of April 2010, ASDA (owned by the US firm Wal-Mart) announced that it had introduced a price promise with the following wording:

“The ASDA Price Guarantee gives you the opportunity to check the cost of your grocery shopping and online order at ASDA against what you would have paid at our 3 largest competitors: Tesco, Morrisons and Sainsbury’s. If you buy 8 or more comparable items and the total cost of shopping or online order at ASDA is more than at Tesco, Morrisons or Sainsbury’s, we will give you the difference plus one penny between the cost of your ASDA shop and the total cost of comparable items at the cheapest supermarket. Price reductions and promotions (such as “2 for £1”, “3 for 2” and “buy one get one free”) are included.”

On the face of it, this sounds like great news for ASDA shoppers – they now have peace of mind when they shop. Their total bill is the lowest it could be when compared with the other major supermarket chains, or at least it will be once they have received the voucher for any difference (plus a penny).

The key features of the guarantee are:

  • Consumers have to go to a web site, identify their receipt in the data base after which the comparison is made through mySupermarket.com
  • The guarantee is on the total cost of the purchase, not on individual prices. Thus ASDA can be cheaper on some goods and more expensive on others and still come out as the cheapest place to purchase the whole basket of goods.
  • Any refund is in terms of a voucher which can only be redeemed at an ASDA store or on the web as a reduction in the cost of the next shop.

The key effects are:

  • ASDA shoppers have less incentive to look elsewhere. Others may start shopping at ASDA. The incentive for the other major supermarkets to respond to ASDA by cutting their price is hence much reduced as this would neither entice new customers from ASDA nor entice defectors back.
  • ASDA can now safely edge their prices upwards, knowing that if rivals do not follow, the ASDA price guarantee will ensure that their customers do not go elsewhere.
  • The overall pressure on prices is hence upwards rather than downwards.
  • Because the refund is in terms of a voucher, a customer who would ordinarily feel ripped off by paying more at ASDA than elsewhere, and hence tempted to try somewhere else next time, is now a lot less likely to do so as this would imply not cashing the refund.

I am not necessarily claiming that this is a deliberately anticompetitive strategy by ASDA, but these are the economic effects.  Before hailing this ‘price promise’ as a bonus for consumers, it is important to remember that identical prices across sellers are not the same as low prices. Indeed price differences among suppliers are what drive consumers to shop around and ensure that suppliers are on their toes pricing their goods keenly.

One Response to The End to Competition Between Major UK Supermarkets?

  1. […] 10 per cent cheaper” (Marketing Week, 15 November).  I have previously pointed out the potential anti-competitive effects of price guarantees, so it is unsurprising that I agree with him on the first point.  I will spell out one overlooked […]

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