Crowds are flocking to the huge new Asda Wal-Mart supercentre on the outskirts of Bristol in search of bargains. In a store the size of one and a half football pitches, almost anything you could wish for, from mountain bikes and televisions to fruit and veg, is on the shelves, and more than likely at a knock-down price.

Since the Rollback campaign was launched when the US giant Wal-Mart took over Asda last year, prices have been slashed on more than 10,000 products. But it’s only the beginning. Two more giant supercentres are due to open in the UK this year, following the Bristol Parkway store’s launch this summer. And the company pulls no punches in its plans to cut prices, pledging to be up to 15 per cent cheaper than its competitors. Pile ’em high and sell ’em cheap - the approach that made Woolworths a high-street name in the last century - has returned with a vengeance.

“People are very price conscious these days,” says store manager Pat Gamble, as he inspects the aisles on a busy Monday morning. “They expect value for money here and, if they don’t get it, they’ll go somewhere else. It’s as simple as that.”

The Rollback campaign has sparked a supermarket war, with reports of dirty tricks campaigns among the big chains as competition hots up. But, as far as Asda is concerned, these are not short-term sales reductions but “permanently low prices”. In its latest “ad match” campaign, Asda promises to undercut any product being advertised by any other retailer, however short term the rival offer is. In an ingenious marketing move, the chain claims its campaign “turns every competitor ad into an Asda ad”.

Wal-Mart’s arrival has already sent tremors through the British supermarket world. “It’s a very exciting project,” says Nick Burr, Asda’s general manager for commercial development, who looks after the non-product side of the business, purchasing everything from paper clips to carrier bags to electronic tills. “We aim to revolutionise the way supermarkets work in Europe.”

But someone has to pay for the price cuts, and there’s no doubt in Burr’s mind where the savings have come from. “Most of it has come from the suppliers,” he says.

Richard Hyman, chairman of retail analysts Verdict, agrees that suppliers are likely to bear the brunt of Wal-Mart’s cost-cutting strategy. He points to a little-noticed announcement made by Wal-Mart at the end of last year - aimed, he says, at Wall Street - saying that the company planned to double Asda’s profits in five years.

This, says Hyman, should be taken seriously. And with consumer pressure ruling out any possibility of raising prices, there are limited options available. Wal-Mart can take advantage of the enormous spending power its huge global operation commands; it can expand volume by opening ever-bigger stores; and it can cut supply chain costs.

“Wal-Mart generally delivers on its promises,” says Hyman. “But, if it delivers on this one, it is going to have to expand the business considerably, and that will mean taking great slugs of business away from the competition. That will mean it is going to have to be even more competitive on price. And that means getting better deals from suppliers.”

But Asda’s approach, says Burr, has been in line with Wal-Mart’s for some years. It’s more a case of Asda already doing business the American way than of the Americans breezing in and turning the way their cute British cousins do things upside down.

“We’ve been nicking Wal-Mart’s ideas for the past 10 years,” he says. “When they came across they were very flattered that we were using their approach. Culturally, the two businesses were closely aligned.”

When Asda’s commercial development department was launched 10 years ago, Burr points out, the chain had about 8,500 suppliers. Now the total is down to just over 1,000, on a budget of about £1 billion a year. The key strategy, he explains, is to cut the number of suppliers and build close relationships with the remainder, so that both Asda and the supplier benefit from higher turnover and reduced costs, and hence increased profits.

But the Wal-Mart takeover has accelerated the rate of change at Asda. Suppliers now have to examine their costs more closely and explore markets outside the UK. Yet Burr denies that the Americans are obsessed with cost alone. “Wal-Mart is very interested in reducing costs,” he says. “It’s what the group is all about. But it is also interested in satisfying the customer. It’s no good having the best prices if quality and availability are not up to scratch. But if we see waste anywhere in the system, we try to get rid of it.”

Suppliers are given every opportunity to prove their worth, says Burr. Companies wanting to supply Asda are given a vendor pack, including a questionnaire to fill in covering all aspects of their business. They are then subjected to an independent audit by consultants to check their capacity, future capability, financial stability, quality control, people management and culture, both in terms of how they compare against competitors in their own field and against those within the existing Asda supplier base.

That, of course, includes examining costs and identifying ways to reduce them by working in tandem. Asda may, for example, offer suppliers the use of its own carriers and insurance to reduce costs. And the supplier’s own suppliers are examined to find further savings. The whole supply chain, from buying raw materials to delivery in store, is scrutinised for potential savings that will benefit the supplier as well as Asda.

In the end, some suppliers win the business and others inevitably fail. But for those that do succeed, says Burr, the rewards can be extremely attractive in terms of increased business and relatively long-term security. “We’re very open about what we want,” he says, “and they’re very open about what they can provide. Somewhere in between there’s a compromise.”

For suppliers, dealing with Asda can mean big bonuses. A deal with Wal-Mart can lead to sales in the vast markets of the US or any of the other eight countries it operates in across the Americas, Europe and Asia. Asda’s George range of clothes is crossing the Atlantic to be sold at Wal-Mart stores.

Bunzl Retail Supplies, based in Manchester, has already benefited, says Bill Kilshaw, its purchasing director and manager of the Asda account. The company has seen its business with Asda grow from nothing six years ago to £36 million a year today. It supplies some 1.2 billion carrier bags and about a thousand packaging products a year.

An indirect benefit has been that Bunzl’s own suppliers, with the help of Asda, are now selling their goods to Wal-Mart in the US. That puts them in a stronger position that could have long-term benefits for the UK Asda operation.

“We view our relationship with Asda as a true partnership,” says Kilshaw. “They’re hard but fair. They demand high levels of service but they promise new business and they deliver it. We don’t see Wal-Mart as a threat but as an opportunity.”

Wal-Mart’s arrival has put other supermarkets in the UK on their guard, although they are staying calm in public. A Sainsbury’s spokeswoman says: “We’re keeping our eyes open, but the sector is already competitive, so we’re continuing to react as we always have.”

But she adds that other attempts at discounting in the UK have not been very successful. “It’s by no means a foregone conclusion. I don’t think it will be easy to apply the US formula here.”

The Kingfisher group, which lost out to Wal-Mart in its bid for Asda last year, has launched its own “everyday low pricing” policy at B&Q and Comet stores. It says that it has emphasised sourcing and supply chain management and expanding global capability. The group’s Far East sourcing operation, based in Hong Kong, has grown substantially, with a new office in Shanghai. Kingfisher has also improved its central sourcing operation for electrical goods. The overall effect, according to its annual report, has been to cut sourcing costs by £29 million gross.

Professor Dan Jones, co-director of the Lean Enterprise Research Centre at Cardiff University, who has worked closely with Tesco over the past three years, argues that the Americans are simply driving down costs without addressing fundamental “end-to-end” supply chain issues.

“Asda Wal-Mart is applying traditional squeeze tactics without any fundamental reforms of the supply chain,” he says. There is still some waste to be squeezed out of most grocery supply chains, but the real gains, according to Jones, come from “a radical redesign of the supply chain, all the way from the production line, through distribution and the store, to the customer’s home”.

Because actions at one point in the supply chain may produce benefits further down, and vice versa, these gains can only be reached by finding a new deal from which both sides benefit, he says: “This is not soft partnerships and wishful thinking, but hard-nosed, win-win gains that can significantly improve the performance of the supply chain as a whole, increasing profits and improving customer service.

“Everyone is good at optimising their part and protecting themselves against upstream and downstream partners, but no one has tried to optimise the whole supply chain like Tesco. If successful, it will steal a lasting march on competitors rather than achieving only a short-term blip in market share.”

Barry Evans, lean process manager in supply chain development at Tesco’s Cheshunt head office, warns against the “hype” surrounding Wal-Mart. Tesco’s work with the Cardiff centre over the past three years has provided what he describes as a “powerful road map” that will equip it for the future.

The operation has focused on examining the whole supply chain to make sure it is working effectively. Only by doing that, he says, can the foundations be set for cutting unnecessary costs out of the system. It is based on classic lean principles: drive up quality and delivery effectiveness and costs will fall out naturally.

“Once you’ve got supply chains flowing and delivering product value effectively, that’s when you can start raising efficiency without detracting from effectiveness,” he says. “There is logic in what we’re doing. We’re increasing the gap between ourselves and our competition. All the indicators are that we’re moving in the right direction.

“Wal-Mart’s arrival will put pressure on anyone who is already weak, but we’ve always thrived on a bit of competition. It won’t do us any harm at all.”

There are two main obstacles to Wal-Mart in the UK. One is the recent government decision to restrict the growth of big out-of-town superstores. Securing planning permission for these, which is easier in the US where there is more space and land is cheaper, will become increasingly difficult.

Several supermarkets have already reacted to this by opening much smaller stores in the high street and at petrol stations. Asda has also reversed its tradition of going for the biggest sites possible, despite earlier claims by its chief executive, Alan Leighton, that he would never contemplate buying anything less than 40,000 sq ft. Now Asda plans to develop different-sized stores, with the smallest category, Asda Fresh, no larger than 30,000 sq ft. The “big is beautiful” philosophy on which Wal-Mart made its fortune may well have had its day in the UK.

Second, a Competition Commission report due out next month promises to lay down tough rules not only on pricing transparency - possibly including a requirement to publish all prices on the Internet so customers can compare them - but also on dealings with suppliers.

Wal-Mart could be vulnerable here because, being by far the biggest player, it is an easy target for accusations of wielding its power unfairly. A glance at the Internet shows there are many people with grudges against the company, however trivial.

UK supermarkets have it all to play for. But there seems little doubt that the US approach has already had an impact. For suppliers, the stakes are high.

“This is a long game in which the fittest will survive,” says Asda’s Nick Burr. “It will set the precedent for everything that happens in Europe. But, ultimately, we have to focus on what’s important: for us, it’s the customer. So long as our suppliers deliver what our customers want, they have nothing to fear.”

Supermarket sweep: how the top UK players fare

Asda

Market share: 16.4 per cent

Number of stores: 240

Strategy: ambitious new store programme, including Asda Wal-Mart superstores. Aims for “everyday low prices” not special offers. Pledged to achieve prices between 10 per cent and 15 per cent lower than competitors.

Sainsbury’s

Market share: 18.2 per cent

Number of stores: 432

Strategy: former market leader says it will not fight a price war. Emphasis on high-quality, own-brand goods.

Tesco

Market share: 24.7 per cent

Number of stores: 658

Strategy: key words are “quality, choice, convenience and price” - pursuing “flexible format” on new stores, from small to large sites. The market leader has energetic expansion plans in the UK and abroad.

Somerfield

Market share: 9.4 per cent

Number of stores: 1,350, including 753 Kwik Save

Strategy: new management hopes to turn group’s ailing fortunes around. But low-cost Kwik Save is here to stay following attempts to sell it.

Safeway

Market share: 10.3 per cent

Number of stores: 482

Strategy: concentrating on refitting existing stores - only two new stores opening this year. Aims for “great deals and overall value”.

Regulation

Protecting suppliers

Some of the measures that the Competition Commission is expected to recommend in its report, due out in October, are:

∙ Supermarkets should not use their buying power to distort competition or restrict consumer choice.

∙ Suppliers should be clear what price they will receive when they accept orders, and should not be made to vary terms without reasonable notice.

∙ Suppliers should not face unreasonable or discriminatory trading terms or conditions.

∙ Discounts, penalties and extra costs should be agreed in advance.

∙ The same quality standards should apply to all suppliers.

∙ There should be no demands for financial contributions to any third parties.

∙ Exclusive supply arrangements should include benefits for suppliers.

∙ There should be no interference with suppliers’ other business activities, including prices they charge other retailers.