Morrisons has pushed the button on the grocery price war that many industry watchers have been predicting for months, if not years.
The retailer this week posted a £176m pre-tax loss after writing down the value of its property and IT, and its Kiddicare business. Underlying pre-tax profits fell 13% to £785m on total sales down 2% to £17.7bn for the year to 2 February, while like-for-likes were down 2.8%.
But the main news was its plan to slash its margins as it looks to stem the tide of shoppers deserting it for the discounters.
Morrisons said it would invest £300m this year as part of a wider £1bn investment over three years in price, promotions and own label.
The impact would be a fall in underlying pre-tax profits for next year to between £325m and £375m, it forecast.
Morrisons: the fightback plan
- An investment of £300m this year in price, promotions and own label - part of a three-year, £1bn investment.
- Sharper more targeted promotions based on data from new Morrisons card.
- 10% fewer promotions
- A review of own label to develop a hierachy better suited to customer expectations.
- Sales based ordering by 2017.
- Acceleration of online and convenience rollout.
- Sell-off of Kiddicare and 10% stake in Fresh Direct.
- £1bn cashflow generation over three years from operating improvements, working capital and reduced capex.
- £1bn of property disposals over the next three years.
CEO Dalton Philips said Morrisons would not look to compete with the discounters head-on in terms of pricing, but acknowledged it needed to get closer to them.
“We are looking to narrow the price gap. We don’t need to match them outright on price,” he said. “When the gap widens, we see more of our customers switching to the discounters and when we become closer on price, they come back to us.”
Morrisons was looking to “carve out a clearly defined position as a value-led grocer with fresh, great quality food”, added Philips. “It will be value without compromise”.
It also wanted to deliver more effective targeted promotions, which would be boosted by the launch of a Morrisons card this year, he said, adding that it would start trialling the card over the next couple of months and had looked at a wide range of loyalty schemes used by retailers around the world to deliver something that would be “customer-focused and uniquely Morrisons”.
He admitted Morrisons had a problem in delivering promotions because “we don’t know our customers” and revealed the retailer planned to cut the number of deals it offered by around 10%.
Shore Capital analyst Clive Black said that the new price offensive was proof that Morrisons’ “strategy to rapidly broaden its appeal by making it more aspirational and upmarket hadn’t worked and it is materially going back to the future”.
There was a very real danger of Morrisons’ big four rivals being sucked into a price war, he added. “What we have to look at now is contagion,” he warned. “This move back into that part of the playground with Asda and the discounters is a threat to Asda but could also challenge it into being bolder still.”
”Tesco will have to match this through Price Promise, but will Tesco be happy to passively match this or will it look to set its own agenda?”
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