* Suppliers see limited impact from supermarkets' battle
* Any hit to margin likely to affect retailers, not suppliers
* Self-help measures to boost suppliers' positions
By Neil Maidment and Martinne Geller
LONDON, April 8 Supermarket discount wars have long been the stuff of nightmares for grocery suppliers expected to slash their own prices in turn, but this time around in Britain many say they are sleeping just fine.
Tesco, Asda and Morrisons have together pledged 2.4 billion pounds ($4 billion) in lower prices to compete with fast-growing German-owned discount chains. But many experts think an all-out price war is unlikely and for now supermarkets are footing the bill themselves, not squeezing their suppliers.
Tesco, for example, has effectively given up setting a target for the profit margin it makes in Britain as German discounters Aldi and Lidl expand their share of the market, growing at 35.3 and 17.2 percent a year respectively versus virtually zero for Britain's "big four".
The traditional market leaders - including Sainsbury's - are closing price gaps with the upstarts by offering four pints of milk for a pound or less, but they do not want to be seen as exploiting British farmers or skimping on quality.
"In the late 1990s, it would just be a case of 'take your prices down'," Shore Capital analyst Clive Black said of the way the supermarket chains treated suppliers. "Then, retailers were fast-growing ... and it made sense for the supplier to follow them. Today it's a more involved conversation."
The shift in the balance of power between retailer and supplier has also been aided by developments such as a more favourable regulatory environment for manufacturers, a proliferation of outlets such as discounters and online, and a sharper consumer interest in food quality and traceability.
After a scandal last year over horsemeat in processed beef meals shook consumer confidence in supermarkets, a leading meat supplier to Tesco told Reuters a new customer focus on quality meant meat prices should not be hit in any discounting battle.
"It's not all about price, it's about quality levels, it's about transparency, it's about provenance choices, health choices," Hilton Foods' CEO Robert Watson said.
Milk suppliers have also not seen margins suffer from grocer price cuts, say dairy cooperative Arla and farmers.
"We have not been affected as yet by the supermarkets reducing their prices," said Gloucestershire dairy farmer Graham Walker. "There's no point worrying about it, you just have to work harder and become more efficient."
Many of the big chains, as well as upmarket grocers Marks & Spencer and Waitrose, have their own dairy groups, so they can promote the fact they buy from their own farms. Squeezing those same farmers would risk a PR disaster.
ROOM TO NEGOTIATE
Retailers are also unlikely to get much flexibility from manufacturers of big household brands. They reckon supermarkets dare not risk failing to stock products that are in high demand.
"Can you imagine a retailer with none of our products?" said a senior executive at a major international food supplier.
Also speaking privately, the head of a leading supplier to British grocers said that while shoppers could expect prices of some core items like fresh vegetables to stay keen, the range of goods subject to any discount war would remain relatively small, creating less of a worry for suppliers.
"I think retailers will accept a reduction in their margin as a price of doing that, so they won't seek to, or expect that, they will pass all that onto their suppliers," he said.
Morningstar analyst Kenneth Perkins said British grocers have operating margins of roughly 5 percent, higher for example than the 3 percent margins at U.S. grocer Kroger and France's Carrefour.
A director of another company which supplies Britain's big grocers said that this healthier margin offered "significant scope for rebasing". Supermarkets could also cut back on costs, for example by swapping checkout staff for automated tills.
Suppliers are also changing strategies, ramping up marketing of their brands, like Premier Foods, or, like Greencore , expanding in growth areas such as sandwiches and sushi for the fast-growing food-on-the-go side of the market.
Some are finding success selling branded products to Aldi and Lidl, whose rise has been built on cheap, own-brand lines.
"It's possible to get in there, and we're starting to see growth," said Chris O'Leary, head of General Mills' international unit, of the way the U.S. maker of Cheerios cereal and Haagen-Dazs ice cream was selling to the discount chains.
Shore Capital's Black said suppliers could also improve profits by trimming their ranges or making price cuts to retailers conditional on the supermarkets taking more volume.
For the grocers, looking inward for savings may ultimately prove cheaper and more effective than provoking a sustained price war that would demolish margins built up over decades.
"No one really wants to launch a price war as such, because all the competitors would immediately respond and no one would gain," said Richard Perks, retail research director at Mintel.
"The retailer ends up lacking the money to invest in his business and store standards and everything else drifts downwards."
($1 = 0.6020 British Pounds) (Additional reporting by Jemimah Kelly; Editing by Alastair Macdonald)