Morrisons seeks middle ground to differentiate from discounters

Morrisons will slash prices and invest in the quality of its products as it tries to mitigate the impact of the growth of discounters and halt its market share slide. 

Morrisons issues profit warning and announces plans to invest £1bn in price over next three years.

The supermarket says it will invest £1bn over the next three years, including £300m in 2014, on cutting prices, as well as accelerating its investment in “new channels” including online and convenience. However, this has led Morrisons to issue a profit warning, with the retailer saying that underlying profits for the 2014/2015 financial year will be between £325m and £375m, less than half the £785m it made in the prior year.

Sales at stores open for more than a year were down 2.8 per cent in the year to 2 February 2014. Kantar Worldpanel figures released this week estimated that Morrisons’ market share over the 12 weeks to 2 March fell to 11.1 per cent, from 11.8 per cent a year ago.

The supermarket also announced the trial of an “innovative” click and collect format and plans to double the number of convenience stores to 200. It also says its new loyalty programme will be fully rolled out by the end of this year and it will target fewer, more impactful promotions.

Jefferies analysts said Morrisons was “getting the bazooka out” after recognising that its “relative value positioning versus purely price-driven competitors is detracting from its appeal”. Despite the profit warning, Bank of America Merrill Lynch analyst Xavier Le Mene believes Morrisons is making the “right move strategically”.

Dalton Philips, Morrisons chief executive officer, says: “The strategy we are announcing today is a bold and comprehensive response to the fundamental structural changes that are taking place in grocery retail.

“We are significantly reducing our cost base and will invest £1bn into our proposition over the next 3 years to improve our value even further and to defend and strengthen our competitive position. Customers will see this in our stores as well as in our fast growing online and convenience offers.”

Morrisons is the latest supermarket to focus on price and quality as the big four look to take on the discounters. Tesco has already announced plans to invest £200m this year in cutting its prices, while Asda is investing £300m. All three have launched marketing campaigns touting their low prices.

However, Morrisons says it is aiming at the middle ground between the big four and the discounters by continuing its focus on fresh food, value and services, as well as price.

Morrisons posted a pre-tax loss of £176m for the year to 2 February following a write-down of its property, IT and Kiddicare business. It is now planning to exit from “non-core activities” including Kiddicare and Fresh Direct, with a sale of both businesses now likely.