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Why Wal-Mart could start new UK grocery price war

Promotional signs display the price of merchandise as shoppers browse goods inside an Asda supermarket, operated by Wal-Mart Stores in London.
Simon Dawson | Bloomberg | Getty Images

Supermarket retailers in the United Kingdom might be forgiven for thinking a price war truce might be overdue, but HSBC believes a fresh battle may be just around the corner.

In a note published Wednesday, the bank's food and retail analysts said Wal-Mart International CEO David Cheesewright, had been clear that subsidiary grocer Asda is set to prioritize sales over profit.

"We believe this suggests Asda may be preparing a major price repositioning. If Asda does reposition fundamentally, then it could seriously damage sector profitability," said the note.

In the 12 weeks to 19 June, Asda sales dropped 5.8 percent according to figures from Kantar Worldpanel.

HSBC said Asda needs to gain price leadership as prioritizing margins will only lead to further loss of its deal – hungry customers.

HSBC also stated the message on price was intended for shareholders and any inaction from Wal-Mart International now would be interpreted as an absence of conviction.

The analysts also suggested the comments serve as a warning to what discounters can expect in the U.S. market.

Sector downgrades

As a result HSBC has downgraded ratings on competitors Tesco, WM Morrison and Sainsbury as it bets on a fresh round of price pressure in the sector.

It sees rival grocers Tesco and Morrison's suffering in the short term but picks J Sainsbury as the overall loser as it wrestles with a weaker balance sheet.

HSBC concluded that a new price war will see the shuttering of stores as they enter loss-making territory.

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