etween Britain’s leading supermarkets as they battle to see who can knock the most value off the others’ share price?Morrisons had a pretty good crack on Thursday. As well as wiping 12pc off its own share price after publishing annual results, it knocked 8.5pc off Sainsbury’s, 5pc off Tesco and 3pc off Marks & Spencer. The severe declines were prompted by Morrisons’ pledge to cut prices aggressively and slash its profit margin in order to stop a decline in sales.
Sir Ian Gibson, the chairman, described the strategy as a “reset” of the profit base. That is the polite way of putting it. Morrisons’ results were tantamount to a permanent profits warning. The company said that underlying profits this year will be between £325m and £375m – less than half of what was achieved in 2013.
This is partly because Morrisons has made a series of strategic blunders – including investing in convenience stores and the internet later than its rivals, and focusing on developing its fresh food with upmarket “misty vegetables” when most of its northern customer base were focused on watching their pennies. However, Morrisons is also reacting proactively to the dramatic changes taking place in how British families buy food.
It is worth remembering that Morrisons’ eye-watering annual results have arrived just two weeks after Tesco chief executive Philip Clarke abandoned his company’s 5.2pc profit margin.
Tesco and Morrisons had the highest profit margins in the grocery industry. But the glory days of 5pc margins are disappearing.
Morrisons says the growing popularity of the discounters, Aldi and Lidl, is to blame for the downward pressure on margins. The German chains have focused on improving the quality and reputation of their food, while also opening small stores in convenient, neighbourhood locations. This has perfectly tapped into the demands of middle-class British consumers who have sought to control their spending amid a squeeze on earnings. The latest market share data from Kantar show Aldi sales growing at 33.5pc and Lidl’s at 16.6pc. Meanwhile, Tesco’s market share has fallen to its lowest level in a decade.
Morrisons believes that Aldi and Lidl are here to stay and their popularity is not solely down to present economic conditions. Their rise is similar to emergence of easyJet and Ryanair in the airline industry, and Morrisons feels it needs to act before it is too late.
Details about Morrisons’ price cuts were vague. However, the retailer is looking to put £300m towards lowering prices of key products this year. The company does not believe it can match Aldi and Lidl across the board – given that the discounters stock 2,000 products, compared with 25,000 for Morrisons – but if it closes the gap, then shoppers could be more attracted by its unique selling points.
But it is not just the discounters that are squeezing margins. The changing habits of British families are also posing a dilemma for food retailers. As customers switch their grocery spending from a weekly shop in an out-of-town supermarket to an online shop and a series of trips to local convenience stores, margins for the leading grocers are coming under pressure.
