What have the UK’s Supermarkets got to resist the resurgence of Asda?

The UK’s supermarkets continue to provide both thrill and fear in equal measure this year. We recently looked at Tesco (TSCO) and how it compared to sector peers J Sainsbury (SBRY) and WM Morrison (MRW) on a fundamental and technical/charting basis. Now, it appears we need to add a bit of good old fashioned news to the equation.

The news of interest is Wal-Mart CEO David Cheesewright having divulged how disappointed he was with Asda’s recent performance, voicing his intent to invest heavily in price at the US retail mega-giant’s UK subsidiary. What ‘investing in price’ means (and it’s a term you’ll hear often in the retail sector) is lowering prices. That in turn signifies that the hitherto fearsome price war between the grocers is far from over. In fact, it looks set to intensify.

Somewhat counterintuitively, in the 22 weeks to 22 May, sales at Asda were down 5% while those at Tesco, Sainsbury’s and Morrison’s were down 1%, 1.2% and 2.1% respectively, yet shares in the UK’s blue chip supermarkets took a major turn for the worse on Friday 3 June. Why? Because investors buy into the outlook, not for past performance.

Investors reacted to Cheesewright’s aggressive rhetoric by selling shares in the UK’s big three listed grocers en-masse, spooked at the prospect of a second round for the price war. But what if that selling was overdone? Where there’s panic and blood, it’s often a sign that oversold conditions may not be far off.

In terms of products, Asda is already one of the UK’s cheapest supermarkets. How can it possibly sell its wares for less and still protect margins? And if it’s the cheapest, then why is it also the worst performing of the UK’s ‘big four’? Is there a correlation to be had here?

Is Cheesewright’s strategic shift from protecting profits to protecting market share set to damage parent firm Walmart in the US, a bit like Saudi Arabia’s attempts with OiI? Surely the investment in price approach is based upon a Strong Walmart financing it, which in turn depends on continued confidence in US economic strength. Well, one only has to look at the last US Jobs Report and what that said about the prospect of a summer US rate hike to see that things may not be as good as we thought they were. That surely affects Walmart’s outlook – which is the thing investors are interested in.

Will Sainsury’s, Tesco and WM Morrison hold their ground against a weaker Asda? Indeed, what will the UK’s market leaders come back with to reassure shareholders? Sainsbury’s latest update already suggests it is set to adopt a much simpler pricing strategy after customer feedback on complicated promotions.

After a nigh on 3% (knee jerk?) sell-off across the board, could now represent a good time to buy the UK supermarkets? If so, which offers the best opportunity right now? Have you got your bag-for-life and loyalty card at the ready?

Read on for a look at where the UK’s supermarkets are now, what investors should be looking out for and where the shares might be headed next.