Fears of grocery price war may prove unfounded

Opening salvos in what could turn out to be the next grocery price war have been fired, with a number of supermarkets cutting prices in response to the arrival of German discount supermarket Aldi in the Irish market.

But it is still unclear whether the skirmishes will turn into a full-fledged price war, a prospect that has suppliers and retailers shuddering, or what the long-term impact of the latest newcomer to the Irish grocery trade will be.

Aldi opened stores in Parnell Street in Dublin and Ballincollig, Co Cork, last month and announced plans to open up to 10 more shops over the next year. Its no-frills, low-price approach immediately hit a chord with price-conscious shoppers who jammed the aisles, lured by discounts of up to 30 per cent on a range of 500 own-branded goods.

However, reaction from suppliers and other retailers was swift. Milk producers, angered at Aldi's decision to sell Northern Ireland milk at prices substantially below those prevailing in the Republic, held protest meetings outside the Ballincollig store and the Irish Farmers' Association warned that short-term gains for the consumer would damage producers, retailers and the industry generally.

At the same time, Dunnes Stores cut prices on five food staples although only in shops located near Aldi. Tesco acknowledged "some price adjustment in some stores" but declined to provide details, and a Super Valu spokesperson said its stores would "compete where we have to". There are two Super Valu shops in Ballincollig.

Retailers seem to be taking a dual approach to Aldi, cutting prices while downplaying the potential threat. They point out that discount shopping was tried in the early 1980s - by Albert Gubay and Three Guys - and failed. In addition, consumers are extremely brand-conscious and would balk at the lack of known brands, while lengthy queues and a limited range would deter customers. "I'm not complacent but it would be wrong to grossly over-react as well. They only have two shops," said Mr Michael Campbell, director general of RGDATA, the trade association representing independent grocers.

Ms Ailish Forde, assistant director of the Food and Drink Federation within IBEC, agreed. "Research has shown that Irish shoppers are concerned with quality, service and convenience. Price is important but it's not the be-all and end-all," she said.

The fear is that newcomers might ignore Irish suppliers and source their goods from abroad, and their low-price strategy could spark a price war among the large multiples similar to the one that devastated the industry in the 1980s. That battle led to the collapse of the H. Williams chain and forced many small firms out of business.

Similar fears were expressed when Tesco entered the market in 1997 following its purchase of the Quinnsworth chain. Retailers worried that they would be swamped by their larger rival's economies of scale.

"From the suppliers' point of view, the danger was that Tesco would source most of its goods from the UK and, from an Ireland Inc point of view, that was not good because of our large food manufacturing industry. Although that industry is export-oriented, it needs a strong domestic market to launch and test new products," Ms Forde said.

Following discussions with Government officials, Tesco agreed not only to continue sourcing the same amount of goods from Irish suppliers but to increase it. The company, which has a 22 per cent share of the Irish market, also agreed to manage its Irish operation from Ireland and not from the UK.

"What we're saying to Government is, that's a good model and others should follow it," Ms Forde said. "It's very important that the same be done with the Aldis of this world. Discounters need to be monitored to make sure they're behaving properly.

"For the overall grocery market, we don't want the price wars of the 1980s to start again."

The Competition Authority, however, has welcomed Dunnes' decision to cut prices in response to Aldi as good news for the consumer. It has also warned the IFA that Aldi's low milk price does not constitute below-cost selling and that any attempts to interfere with its right to set its own price would be a breach of the Competition Act.

Meanwhile, the Groceries Order, which prohibits practices such as below-cost selling, boycotting of suppliers and so-called "hello money", is being examined by the Competition and Mergers Review Group, with some in the industry privately acknowledging that it could be seen as a protectionist measure and thus in breach of EU open market laws.

Whatever the outcome of that review, it seems certain that the trend of international supermarkets moving into the Irish market will continue. A second German discounter, Lidl, plans to open six Irish stores next year. There has also been speculation that WalMart, the largest retailer in the world, might be interested in acquiring Dunnes Stores as part of a major expansion into the European market.

But the traffic is not all one-way. Musgrave-Super Valu-Centra has operations in Spain and has said it is actively looking for other opportunities abroad. Dunnes has operations in Northern Ireland and Britain, while Tesco - although not an indigenous Irish company - has shops in eastern Europe and south-east Asia.

"Internationalisation and consolidation is a feature of global retailing, just as it is of many other industries such as financial services and media. It is becoming evident across the world and across Europe and it's now coming to Ireland," said Mr Dermot Breen, director of corporate affairs with Tesco Ireland. "If Irish retailing is to survive and thrive, it must be prepared to adapt to the fact that we are in a more competitive market and a changing market."

In these circumstances, the hype which greeted Aldi's arrival could well turn out to have been much ado about nothing.