Morrisons’ price cut strategy signals supermarket war

By Michael Stones

- Last updated on GMT

Tesco, Sainsbury and Asda will be forced to respond to Morrisons’ lower prices
Tesco, Sainsbury and Asda will be forced to respond to Morrisons’ lower prices

Related tags Morrisons Supermarket Asda

A supermarket price war is likely to follow Morrisons’ pledge to cut its prices, in a bid to combat discounters Aldi and Lidl, after the retailer posted a loss of £176M last week, according to leading analysts.  

Tesco and Sainsbury would be forced to respond to lower prices from Morrisons, said Euan Stirling, of Standard Life Investors. “I don’t think they can stand by and let Morrisons attack them on price,” ​said Stirling. “I think it is almost inevitable we will see much more aggressive price action, from Tesco and Sainsbury and others in the sector,” ​he told BBC Radio 4’s Today​ programme.

But it was not only competition from discounters that was pressurising the big four supermarkets, added Stirling. They were also losing out to the more upmarket retailers such as Waitrose and Marks & Spencer and online companies such as Ocado.

“So they really do have a tough competitive position. But I don’t think, given the amount they​ [the big four supermarkets] have spent on real estate in recent years, they can afford to sit by,”​ said Stirling.

City analyst Shore Capital said Morrisons’ decision to re-base its trading margins was probably “a game changer”​ for British supermarkets.

‘Almost uninvestable for a good while’

“While we cannot be certain, we believe that the group's decision to more assertively and aggressively focus on value will lead to further industry downgrades and a reduction in visibility as to if and when the downgrade cycle will come to an end,”​ said Shore Capital analysts Clive Black and Darren Shirley. “As such, it makes the sector almost uninvestable for a good while.”

Tesco had “rattled the margin cage” ​with its £200M of price cuts, announced at its capital markets day on February 25, said Shirley and Black. “With Morrisons’ re-basing, Tesco arguably faces a worse potential position than we previously thought,”​ they added.

While Tesco’s Price Promise will, in theory, result in Tesco matching Morrisons’ price cuts, it could have a negative impact. “The Price Promise could be dishing out vouchers left, right and centre, so making Tesco look constantly expensive in the eyes of its customers.” ​This could lead to more defined response from Tesco, they predicted.

‘heavy price for the failure of the strategy’

“Any anticipated response from Tesco poses considerable potential dangers for Morrisons, as it may simply be transferring value from shareholders across the sector to customers,”​ said Black and Shirley. “That is a very heavy price for the failure of the strategy revolving around Fresh Formats, M-Local, Kiddicare, Fresh-Direct and the entry online.”

While Sainsbury had a degree of differentiation, which could shield it from some discounting, it could not remain immune in the weak grocery trade.

The impact on Asda could be mixed. On the positive side, the retailer enjoyed a strong price file and could benefit from the market “shifting its way a little with price value higher up the agenda”.

But, Asda too will be forced to respond as a key competitor becomes more aggressive, said Shirley and Black.

Meanwhile, premium retailers Marks & Spencer and Waitrose, while not unaffected by price cuts, will be likely to benefit from their upmarket positions.

The Conlumino Team noted the “immense pressure”​ on all the big four retailers. “There is tension in the grocery market with the discounters pulling in spend and consumers reducing the volume of goods they buy,” ​it said. “Tesco and Asda, as well as Morrisons have seen market share losses in recent times, but Morrisons has been particularly exposed to these trends.”

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