UK supermarket Sainsbury's says prepared for price war escalation

Sainsbury's said on Wednesday it was prepared for an escalation of price wars in Britain's highly competitive supermarket sector after reporting a decline in underlying quarterly sales.

With profits squeezed by the growth of German discounters Aldi and Lidl, Britain's "big four" supermarkets have been under pressure to cut prices and improve customer services.

Wal-Mart, the owner of the Asda chain, said last week it would shift the strategy of its British business from safeguarding profit to protecting market share, indicating a new price offensive is on the way.

"For the last God knows how many years there's been lots of noise from Asda and indeed lots of noise from everybody else," Sainsbury's CEO Mike Coupe told reporters.

"If things change, we'll deal with that but we'll maintain our price position," he added.

He said Sainsbury's had stuck to a strategy of lowering its regular prices and cutting back on multi-buy promotions, adding that it had never been more competitive on prices than now.

Coupe's strategy is also focused on better product quality and availability as well as improvements to customer service. However, the company has still reported two straight years of profit decline.

Sainsbury's is the second largest of Britain's main supermarket groups, trailing clear market leader Tesco but ahead of Asda and Morrisons.

"While investors continue to worry about the possibility of an Asda backlash...Sainsbury's appears to be paying the heavier price of Tesco taking back customers," said analysts at Jefferies.

HOME RETAIL DEAL

Coupe, who has been in the top job for almost two years, was speaking after Sainsbury's reported first quarter sales fell less than feared but combined that with a cautious outlook.

Its shares, down 7 percent over the month before Wednesday's update, gained 1.2 percent to 249.8p by 1100 GMT.

Sainsbury's, which in April agreed a 1.4 billion pound ($2 billion) takeover of Argos-owner Home Retail, said comparable sales fell 0.8 percent, excluding fuel, in the 12 weeks to June 4, its fiscal first quarter.

That was slightly better than analysts' average forecast of down 1.4 percent but compared with a rise of 0.1 percent in the final three months of the supermarket's last financial year, its first quarter of growth in over two years.

"Market conditions remain challenging. Food price deflation continues to impact our sales and pressures on pricing mean the market will remain competitive for the foreseeable future," said Coupe, though he still expects Sainsbury's to outperform its major rivals.

Sainsbury's proposed purchase of Home Retail is currently being considered by the competition regulator, which said last month it would decide by July 25 whether to launch a full investigation.

The deal will allow Sainsbury's to sell more goods such as consumer electronics and reduce its reliance on food and drink.

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