Supermarkets hit by HSBC downgrade on Asda price cut, as deflation continues

HSBC has warned that supermarket sector profit margins are likely to be trampled afresh by a round of heavy price cuts from Asda, further ratcheting up price pressure as industry data shows price deflation continues unabated.

With BRC-Nielsen data also released on Wednesday showing UK shop prices were continuing to fall, HSBC noted that the chief executive of Asda's US owner, Walmart, recently told shareholders that the UK supermarket chain will prioritise sales over margin.

"We believe there are signs that Asda may be about to fundamentally reposition on price, bringing down sector profits," analysts at the bank said.

Having been the UK's most profitable retailer, Asda has the firepower to "seriously damage" sector profitability by forcing capacity out with a major price repositioning.

HSBC, reflecting the increased risk and uncertainty, downgraded Tesco to a 'hold' rating from 'buy', and cut Morrisons to 'reduce' from 'hold', but kept Sainsbury's at 'reduce'.

The analysts added: "Asda has learnt if it prioritises margins, it will lose its sales, which then leads to a falling margin.

"Better a company invests its margin to reward its customers and to protect its sales than to see margins eroded by the competition."