Customers are switching to shopping in the north because of the difference in prices

British supermarket giant Tesco is being forced to cut prices in Ireland, particularly for ambient goods like household products and beauty items, because customers are being turned off by the difference in prices between Northern Ireland and the Republic.

Documents unearthed by Retail Intelligence last week, and seen by the Sunday Tribune, show that the retailer is seriously worried by the impact of price comparison surveys on its sales.

The documents also reveal that like-for-like sales in its southern operation are "well below expectations".

"Consumers, media and government associate Tesco Ireland almost exclusively with price differentials between Northern Ireland and Ireland. Having invested circa stg£3bn in Ireland, the damage to the Tesco Ireland brand by our almost exclusive association with the retail premium versus Northern Ireland is unacceptable," states the document, which was circulated by Tesco's head office in Britain.

Tesco says it is not gaining back the sales lost by people travelling to the North because it does not have a strong presence in towns such as Newry, Enniskillen and Craigavon which are popular with buyers from the Republic. Instead Sainsbury's and Asda have been the ones to benefit.

"Tesco does not have a presence in the main border towns and therefore, unlike international suppliers, cross-border shopping does not 'net out' at group level," it told its suppliers, pointing out that 40% of people from the South are now travelling north to shop and that this figure is expected to increase as the economic climate worsens.

The document was circulated to suppliers, and Tesco told them that it will now source all international branded goods for sale in Ireland through its UK arm in order to gain higher discounts which can then be passed on in price cuts for customers here.

The document says that cross-border shopping has particularly affected sales of ambient branded goods.

However the Sunday Tribune can reveal it is also losing defined grocery market share. Latest figures from market research specialists TNS Worldpanel show Tesco's market share for the 12 weeks ending March 2009 fell from 26.2% to 25.7% compared to the same period last year.

Dunnes Stores' Value Club offer is trumping Tesco, with the Irish supermarket chain showing an increased share of the market.

Tesco has been working on securing the international branded goods through its British head office for about six months. The fall in the value of sterling threw the price differences "into the spotlight" and forced it to look at how to secure the goods in a different way. It is unclear at this stage what will happen to the new arrangements if and when sterling strengthens.

The retailer is believed to think that suppliers here were charging a "glorified margin" because the goods were being sold in Ireland.

With Tesco's new central distribution centre in Donabate in north Dublin, however, the company is unlikely to have to use local representatives to ensure a steady stream of goods as they can now be stored at Donabate. Tesco is widely believed to have the best central distribution facility of any supermarket operation in Ireland.

Tesco has been sourcing some goods on the grey market on occasion but cannot do so on a regular basis because the volumes aren't sufficient and the market is unreliable. It is expected to pass on the price cuts secured using the British operation's purchase power in the coming weeks.

"We have been making these changes around the way we source international products so in time we will be able to reduce prices for consumers," a spokesman said.

The document says pricing here will be targeted against both Tesco UK and national competition and that deliveries of some goods will now be direct from Britain.

Tesco will announce its latest financial results this week, and while the performance of the Irish operation is not stripped out, it would not be surprising if reference were made to the market struggles here in an economic environment that even Tesco describes as "tough".