Predictably the new year not only started with the VAT rise but also with a pledge from Tesco to save customers money by slashing prices.

Predictably the new year not only started with the VAT rise but also with a pledge from Tesco to save customers money by slashing prices.

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Sainsbury’s is running its ‘biggest ever’ half-price Sale, while Morrisons has launched its ‘biggest ever’ Price Crunch - claiming it will cancel out the VAT rise - and Asda continues to plug its price guarantee.

It is clear the supermarkets will pile further pressure this year on smaller retailers because they are big enough to swallow some of the VAT rise or can put pressure on suppliers to keep prices low. And as the sluggish consumer environment of 2010 looks set to continue, the grocers look like decent investments.

Last year food inflation dampened grocers’ stocks and many brokers asked where growth would come from. Tesco’s shares were lacklustre as its sales growth steadied, but fears over its performance were overdone.

Tesco will go all out to grab what little UK growth there is this year, and it should be a reliable performer because of its diverse offer. Tesco can be relied upon to steal share in other markets, whether that’s non-food or banking, and try out ideas such as its cash-for-gold offer.

Perhaps even more important is Tesco’s overseas growth. After a difficult couple of years overseas during the global recession, it is making strong headway in most of its foreign markets.

Sainsbury’s and Morrisons do not have the same growth options. Sainsbury’s was the runaway success of 2010 and will continue to perform well in food, but its non-food operation is dwarfed by Tesco and Asda.

Morrisons’ sales growth fell behind its rivals at the end of 2010 but, as shoppers seek to limit spend, its food offer will still appeal. However, Morrisons has a long way to go in other growth areas such as online and non-food. Both will be piloted this year, but they won’t make much of an impact on the stock price in 2011.

Tesco’s rivals might do well to ape some of the grocer’s growth tactics outside food this year - though they have catching up to do.

For analysis of the top grocers visit retail-week.com/rwkb