It is the end of an era for British supermarkets. For decades, they have been among the world's most consistently profitable food retailers. Their innovation - in premium own-label foods and efficient logistics - has justified their profits, in their own eyes at least. And they have built strong loyalties among their customers, which has allowed them to move into a range of other activities, from fast-food to banking.
Why should this happy state of affairs ever change? Two recent news stories indicate why: the intensification by supermarket chain Asda of price competition now that it is under the ownership of WalMart; and the impact of Internet shopping, a trend which the UK supermarkets are among among the most eager participants. Taken together, these two trends will change the rules of the game in UK retailing.
Britain's supermarkets are well-managed and innovative. But their sustained profitability also derives from two factors not entirely the result of their own talents. The first is the relative price insensitivity of Britain's grocery shoppers. Compared with shoppers in many other countries - such as Germany - the British do not place a particularly high value on rock-bottom pricing.
The other factor is the way in which Britain's cramped geography and tight local planning regulations have limited the number of sites available for large supermarkets. This has driven up land prices, and given a decisive advantage to the handful of big chains that can afford the sites and handle the complexities of the planning process.
The outcome, not surprisingly, is limited competition between a small number of big chains. As is often the case in such circumstances, the participants compete with great intensity at the margin: in new product introductions, in customer service, and in carefully restricted price offensives.
They have usually not competed across the board in everyday pricing. Food manufacturers occasionally murmur that they are encouraged by their big customers to help maintain this price discipline, by limiting supplies to smaller competitors that do carry out systematic discounting.
Whether or not that allegation is true, the outcome is the same: a food retailing sector that competes on service, product-range and location, rather than on price.
Until now. Asda has always been the big supermarket chain most likely to break ranks on pricing, partly because of its customer base among less affluent shoppers, partly because of its self-consciously maverick management style.
Now, as part of Wal-Mart, it has a real incentive to make the move. Wal-Mart's access to huge economies of scale in purchasing provides an economic justification for lower prices; its corporate culture of rapid market-share growth through everyday low pricing reinforces that. And offering British shoppers access to US prices in their local supermarket is a promotional tool powerful enough make prices more of a priority.
Doubtless the Asda price initiative will turn out to be more limited than the initial publicity suggests. And doubtless the other big supermarket chains, especially Tesco - which took over the Quinnswortyh/Crazy Prices operation two years ago - will find ways of limiting the damage to their own margins as they respond.
But the chances are good that competition in British grocery retailing will shift away from customer service towards price. That on its own would justify the opening sentence of this article. The era of the Net is just as significant a watershed, however.
The limited price competition in the UK supermarket business is underpinned, remember, by the limited availability of suitable sites. In time, Internet shopping will remove that constraint. Online shopping is now largely handled through existing supermarket sites - with shelf-pickers dodging ordinary shoppers as they zoom round the aisles. But this cannot last. In time, online shopping will migrate to purpose-built warehouses, which need not meet the stringent criteria needed for easy customer access.
Once a significant portion of grocery sales goes through these warehouses, individual supermarket chains will be tempted to grab incremental volume by competing on price, since there is little else to distinguish one home-delivery service from another. There will also be opportunities for new entrants, free to compete without having to find good retail sites. In the US, WebVan and HomeGrocer are raising large sums of capital to build warehouse-based home shopping networks.
IN the UK, the initiative in online grocery rests with the big supermarket chains. Even if they manage to resist the temptation to compete on price in this new shopping arena, Internet shopping will still profoundly affect their business. Their balance sheets are stuffed with expensively purchased property, valuable principally because of its unique location advantages.
If less favourably located warehouse sites become the conduit for a large proportion of grocery sales, property values will sag. The implication for the big supermarkets is not disastrous; but it is different.
A business model based on a traditional asset base, competitive environment and pricing approach will mutate into something quite different. The industry has coped with big changes before, of course. But when such shifts occur, not all the participants make it through to the new era.
