Tesco price cuts to spark a supermarket price war?(Image: Owen Humphreys - PA Wire)

The UK's biggest supermarket will withdraw its huge number of gimmicky promotions and instead slash prices across thousands of products in the run up to Christmas.

From Monday, Tesco says it will reduce the prices of more than 3,000 products - including milk, bread, fruit and vegetables - as part of its Big Price Drop promotion. Future cuts will also focus on "products that families need most," it says in a release.

The news will be welcomed by beleaguered shoppers, who have seen food prices rise at an above-inflation 6.2% over the last year. Sadly, the new price cuts will also signal an end to the popular Double Clubcard points promotion.

Will Tesco outmuscle its rivals?
Rumours that Tesco was planning a big new offensive have been rife this week, and it had been reported that store managers would be called in this weekend to prepare for the drive. Whispers of the news around the City were enough to send shares in Ocado tumbling as the London Stock Exchange opened this morning, although they later rallied.

The online grocer recently launched a Savings Pass scheme that promised to cut prices over and above its existing Tesco Price Match guarantee. Tesco's anticipated move may well be seen as an attempt to use its substantial financial clout to outmuscle smaller but increasingly competitive rivals.

Ajay Bhalla, Professor of global innovation management at Cass business School, said: "Tesco has come under some pressure as we have observed parity in pricing strategies deployed by its competitors ranging from Waitrose to Morrisons. However, with enviable cash position and scale it is in a most comfortable position to use short-term tactics that cause pain.

It may not all be good news
He added that "Ocado's business model in particular is vulnerable to multiple pressures" that could see it struggle should dramatic price cuts take hold across the board.

"Lacking physical presence, reliance on well-off customer segments which are being squeezed by economic environment, Ocado will need to exercise some creative initiative to retain and expand its customer base in the current market."

The move may also pose problems for the likes of Asda, who currently operate a guarantee to beat grocery prices at Tesco, Sainsbury's, Morrisons or Waitrose prices by 10%.

So while the price cuts will be great news in the short term, they could be damaging to the industry as a whole, potentially leading to a less competitive market in the longer term.

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