Time for a diet.

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Suicidal Supermarkets

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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British supermarkets, caught in a price war that's seen two upstart German discounters steal market share month after month, have decided that if you can't beat them on quality, you might as well join them on bargains. But this is a suicidal strategy that fails to acknowledge the changing nature of the food retailing in the U.K.

J Sainsbury, the third-biggest grocery chain, announced this week that it will cut prices on 700 items, part of a 150 million-pound ($227 million) effort to do battle with the cut-price merchants, Aldi and Lidl. The price of a Sainsbury chicken, for example, will drop by 22 percent. Asda, another British grocer, owned by Wal-Mart Stores, says it will invest twice as much as Sainsbury to slash prices on 2,500 products in the first quarter of 2015. Free-range eggs, for instance, will cost almost a third less.

Yet cheaper poultry products won't improve the ailing sales performance of Britain's big four supermarkets:

These figures don't include the key Christmas period. But Sainsbury said yesterday that its revenue dropped 1.7 percent in the 14 weeks ending Jan. 3 compared with a year earlier, suggesting the festive season was as tough as the rest of last year.

Here's what's changing: British shoppers are no longer driving to a massive supermarket with an enormous parking lot to do all their shopping in one weekly splurge. Instead, they're filling their fridges in dribs and drabs with quick trips to smaller shops, and buying food online that gets delivered to their homes. The old-fashioned chains need a response that's more radical than price cuts.

Tesco seems to be wakening to this reality. The nation's biggest grocer -- and the biggest loser from the rise of Aldi and Lidl -- announced today that it will shut unprofitable stores, move to a cheaper headquarters, suspend dividends, slash capital spending, and sell a bunch of businesses it shouldn't have started in the first place, including a television-on-demand service. While Tesco wasn't able to resist jumping on the price-cutting bandwagon -- it also announced 25 percent reductions on 380 everyday items -- investors rewarded the company's larger restructuring with a 13 percent pop in the share price, its biggest jump in six years.

The market's message is clear. Britain's grocers, with their enormous suburban superstores, have grown fat and complacent, amassing land banks they can no longer use and neglecting what their customers want. Cutting prices is a beggar-thy-neighbor tactic that can work for only so long. Like most of us, the grocery chains need to slim down after Christmas -- or risk not surviving to see the next one.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net