Tesco to lead the way on supermarket price cuts by leaning on suppliers

Tesco has informed its suppliers about its intention to reduce prices across its entire range of fresh and packaged products. This move marks the largest review of its kind since Dave Lewis's Project Reset. During a presentation, the retail giant communicated its plan to implement a 'new pricing policy across all tiers,' starting immediately.

At a recent conference, Tesco emphasised its expectation for suppliers to collaborate in transitioning the market from inflation to deflation, aligning with its Fit for Growth strategy. This reset encompasses an extensive range rationalization, a new promotions policy, and will commence with the relaunch of the pasta and pasta sauces category. Subsequently, it will extend to cereals, snacks, home baking, desserts, and the free-from sector, with the remaining grocery sectors following suit later in the year.

Tesco has made it clear it expected suppliers to drop prices. The presentation said the groceries market was moving from “inflation to deflation”, with the retailer claiming conditions were making it easier for suppliers to drop prices.

It cited a 50% drop in wholesale electricity prices, a 22% drop in plastic PET packaging prices, and an 84% fall in the cost of freight over the past year as factors that would enable suppliers to help it drop prices.

Tesco justified the reset by citing the economic climate, the necessity to address inflation, and the opportunity to gain an advantage over competitors through the Fit for Growth strategy. The presentation outlined plans to introduce a new pricing policy across all tiers, enhance the effectiveness of promotions, and eliminate duplicate product ranges.

Phase two of the reset, set to begin next year, will involve a significant overhaul of Tesco's 'macro space,' as the retailer acknowledged its lag in certain areas such as world food.

Experts have cautioned that this reset will have significant implications for Tesco's supply chain, especially considering the ongoing investigation by the Competition and Markets Authority (CMA) into alleged supermarket profiteering. Additionally, the retailer's recent attempts to impose fulfillment fees on suppliers using its online and Booker wholesale services have stirred controversy.

A supplier revealed that Tesco was exerting pressure on suppliers to lower prices. However, they noted that production costs would not decrease until energy and fuel costs returned to pre-Ukrainian crisis levels. Despite falling wholesale energy costs, these savings have not been passed down the supply chain. The supplier expressed skepticism about many suppliers eagerly embracing the opportunity presented by Tesco's proposition of lower prices in exchange for growth.

In response to the situation, a Tesco spokesperson emphasised the retailer's close partnership with suppliers to mitigate the impact of inflation. They stated that as commodity and input prices begin to decline in some areas, Tesco will capitalize on opportunities to pass on savings to customers. They cited the recent price reduction of over 500 household essentials as evidence of their commitment to helping customers reduce their weekly shopping expenses.