Analysis: Lidl's price drop on milk was quickly matched by other retailers, representing the first skirmish of a potential price war
When a supermarket drops the price of a highly substitutable good, e.g. milk or bread, competitors have a number of options available to them. They can maintain prices, introduce bundling (buy-one-get-one-free), compete on quality, or choose to a retaliatory pricing strategy by matching the price drops. Typically, price wars begin with a few skirmishes over retaliatory price drops before escalating into a full-scale conflict.
Lidl has recently reduced the price of a 2-litre milk carton by €0.10 to €2.35. This price drop was matched quickly by the majority of the main retailers, representing the first skirmish of a potential price war. This move comes against the backdrop of heightened awareness of the increased cost of living, CSO figures showing an 18-month high in grocery inflation, and a budget which did very little to fulfil its promise of putting money back in people’s pockets.
According to Kantar, Lidl is Ireland’s fastest growing supermarket, benefitting from cost-conscious consumers switching loyalties as prices continue to rise. Its strategy mirrors the broader UK and Irish approach, competing through lower prices on everyday items, primarily via investment in and price cuts to own-brand goods.
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From RTÉ Radio 1's Morning Ireland, Is there a supermarket grocery price war coming?
The battle lines have been drawn
Price wars have an interesting history, for example, in the early 90’s US airlines competed by offering reduced fares compared to competitors. This led to a marked increase in travel, and record losses. Some estimates put total airline losses during this period as greater than all airline profits since the industries inception. As a result, research has focused on the options available to competitors at the inception of a potential war, as well as what those instigating the war can do to communicate their strategy.
Even in the past 25 years, Ireland has experienced prolonged and complex interactions between competing Irish supermarkets. Lidl and Aldi entered the Irish market in 2000 and 1999 respectively, as discount retailers and shook up the old guard. Then, in 2006 the "Groceries Order" was abolished, allowing below cost selling. Since then, loyalty schemes and member-only discounts have served as defensive strategies, helping retailers retain customers and stabilise market shares. Even the voucher wars, loyalty and members only pricing, can be interpreted as strategic moves in a prolonged price war. What looked like a fresh price war when similar reductions in milk price happened in 2023, failed to materialise as prices quickly reversed direction.
However, Lidl appears to have revealed it’s strategic intentions and capabilities in its opening salvo of the current round. Lidl has outlined that this move will cost €2.9 million, and they have a total of €20 million to invest in price cuts to everyday staples including pasta, cereals and convenience meals, as well as nappies and pet food. Discount retailers have significant economies of scale in their own brand and private label products due to sheer size of their operations across Europe.
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From RTÉ Radio 1's Drivetime, Inflation hits an 18 month high with no cost of living measurs in the budget
In signalling both the total investment and the range of affected products, Lidl may be delineating the "rules of engagement" for a brief, contained price war, one that brings only marginal gains for consumers.
Why is the scope so limited?
In past price wars, supermarkets were willing to sacrifice profits to gain a foothold on market share, or to erode the margins of competitors. However, a recent CCPC report highlights that Irish retailers operate on some of the thinnest margins in Europe, and that competition has largely protected us from even greater inflation seen across Europe.
In addition, the fundamentals of recent price increases are driven by significant increases in the cost of production and overall business operations. Therefore, suppliers will be wary of a price war impacting them. An open question of any price cut is, who is going to pay? Farmers will resist any drop in the farmgate price of milk, but profits at major processors such as Lakeland Dairies and Tirlán could come under scrutiny if consumer milk prices are deemed excessive.
What to expect next?
If theory holds, Lidl has made the opening move, and competitors have followed with retaliatory cuts. This strategy also helps shift public perception, positioning Lidl as passing savings on to consumers while implying that others have room to follow suit.
Read more: How the 'sandwich generation' are caught up in cost of living crisis
Next, further reductions are likely in products perceived as overpriced. With flour prices down roughly 12% year-on-year, bread, cereals, and other flour-based goods could be next. Dairy products such as cheese and butter may also see cuts, along with other everyday staples including pasta, nappies, and pet food as signalled. Initial reductions are likely to be followed in short-order by competitors across the board, mainly on own brand and private label products.
Competitors will likely mirror these reductions, particularly on own-brand and private-label ranges. Yet the overall benefit to consumers may be modest. Lidl’s market share is around 14%, and its planned €20 million in cuts sits within a grocery market valued at roughly €14 billion. Even if all major retailers matched Lidl’s investment, the total consumer benefit might amount to around €140 million, a reduction of only about 1%. The signal for descent into full price war will likely come from a significant spike in market share for Lidl at the cost of market leaders.
For now, the move appears to be a targeted play to retain price-sensitive shoppers in the run-up to the expensive Christmas period, in the wake of a budget that did little to ease household pressure.
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The views expressed here are those of the author and do not represent or reflect the views of RTÉ
