By Mark Potter
LONDON, July 2 (Reuters) - Britain's shoppers are trading down to cheaper food and household goods, spelling bad news for upmarket grocers and their suppliers, but the big supermarkets look set to avoid the deadly price war some investors fear.
Marks and Spencer (MKS.L) Chairman Stuart Rose sent shock waves through the grocery industry on Wednesday by reporting a big fall in underlying food sales and warning of a "very, very intensive food price war that's going on at the moment."[nL02339297].
Shares fell across the sector on concerns that profit margins will suffer or business will seep away to discounters like German-owned chains Aldi and Lidl.
But analysts and industry sources said that, while price competition has picked up among the big four grocers -- Tesco (TSCO.L), Asda WMT.L, J Sainsbury (SBRY.L) and Morrison (MRW.L) -- it appears to be within existing budgets.
This means most of the pain will be limited to the top end of the market, occupied mainly by Marks and Spencer and privately owned Waitrose, and to their suppliers, such as Northern Foods NFDS.L.
"We think there is little if any negative read-through from the M&S (Marks and Spencer) statement to other UK food retailers," Credit Suisse analysts said in a research note.
"With UK food retail stocks falling, we think there is currently a buying opportunity for Tesco and Morrison."
The shock profit warning from M&S is the latest sign that Britain's indebted shoppers are becoming more price-conscious amid rising food, fuel and mortgage costs.
Data from TNS WorldPanel last week showed sales at discounter Aldi surged 21 percent in the 12 weeks to June 15 on the same period the year before, far outstripping a UK grocery market growing 6 percent.
"We get 21 million customers through our stores every week...and they're saying to us their wallets, their weekly spend is constrained, because they've got a lot of other pressures on their pocket," M&S's Rose told reporters.
He said the firm's biggest problem was with its upmarket food offering, where sales at stores open more than a year fell 4.5 percent in the 13 weeks to June 28, and that competition was getting more intense, with both Tesco and Asda recently taking out adverts in national newspapers to announce promotions.
His comments fanned concerns about supermarket profit margins and the growing challenge from discounters. Other food retail stocks also fell alongside a 22 percent slide in M&S shares to a near seven-year low of 246.5 pence.
Sainsbury sank almost 8 percent to a two-and-half-year low of 285.75 pence, Tesco fell nearly 5 percent to a two-year low of 345.3 pence and Morrison slipped over 4 percent to an 11 month low of 251.75 pence.
Shore Capital analyst Darren Shirley, however, said the big grocers had little to fear from customers trading down though he thought Sainsbury was a bit more exposed due to its more upmarket image.
"No one's going to be immune from trading down. But it's swings and roundabouts," he said. "If you look at someone like Tesco and maybe Morrison, you may get people trading down out of you into the hard discounters, but you may benefit from people trading out of the likes of M&S and Waitrose into you."
Shirley said competition was intense, but under control.
"A price war is when you maybe have 1 percentage point off margins. We think the likes of Tesco and Asda have been budgeting for this, so there's going to be very little impact on margins, if any, once you get the volume benefits coming in."
Exane's Tim Attenborough agreed a price war was unlikely.
"I don't think that's on anyone's agenda. We're in a rational market and there are no floundering food retailers and so there's no market share up for grabs," he said.
A spokesman for Tesco said: "There is intense price competition, but it's part of the regular cut and thrust of the industry." He declined to comment on profit margins.
Asda, Sainsbury and Morrison had no immediate comment.
(Editing by Erica Billingham)
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