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Morrisons Gamble on Price Reductions

03 April 2014

After reporting disastrous Christmas results, Dalton Phillips, Chief Executive at Morrisons, has rolled the dice and gambled on winning back market share with plans to spend £1 billion on cutting prices over the next three years.

Asda has responded with an advertising campaign promising big savings on major brands, while Tesco unveiled plans for £200 million of price cuts on core products. In contrast, Justin King, Chief Executive of Sainsbury’s, has been rather dismissive of these price cuts by rivals describing them as “the usual cut and thrust of the market.” However, a number of analysts believe it will not be long before Sainbury’s are forced to react with similar price cuts to stop its competition stealing a march on them.

The big four have been so focused on each other that it has allowed the discounters, Aldi and Lidl, to expand rapidly, even shedding their no-frills image, resulting in better off shoppers also turning to them. Dalton Philips has said there has been a “fundamental shift in how consumers view discounters” and that Morrisons needed to respond with a “bold plan.”

Analysts are clearly worried by the prospect of an upcoming price war and on hearing the news of the price cuts almost £3 billion was wiped off the value of Britain’s multiple retailers. HSBC, which also recently cut its predictions for Morrisons and Tesco, said that “Morrisons lacks scale compared to its rivals and the multi-national discounters” and could not see where future sales growth could come from.

Unlike the big four, Aldi and Lidl are not resting on their laurels and have themselves responded with price cuts of their own.  The big four face the prospect of eroding profit with little impact on sales. With overall demand in the market relatively benign, future growth is likely to be reliant on taking market share from competitors.

Morrisons will fund part of these price reductions through the sale of non-core assets including £500 million of property.  Tesco has started to pilot a restructuring of staff across its stores with the axing of team leader roles. 

Changes in the market should benefit the consumer but can we really believe that the large multiples will bear all the costs of any price war? Yet again suppliers will be squeezed and ultimately invited to share the costs disproportionately as has happened all too often in the past.  Let’s hope it doesn’t get too out of hand.

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