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March 13, 2014

UK: Morrisons ups price investment to fight discounters

UK grocer Morrisons plans to increase its investment in pricing in order to "strengthen" its competitive proposition.

UK grocer Morrisons plans to increase its investment in pricing in order to “strengthen” its competitive proposition.

Morrisons revealed that it will invest GBP1bn (US$1.67bn) in “self help” measures over the next three years, with a GBP300m investment in its proposition planned for fiscal 2014/15.

“The strategy we are announcing today is a bold and comprehensive response to the fundamental structural changes that are taking place in grocery retail,” chief executive Dalton Philips said today (13 March).

“We… will invest GBP1bn into our proposition over the next three 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.”

“The GBP1bn investment will be primarily in 1) permanently lowering prices, 2) fewer more impactful promotions, 3) making own brand more competitive & 4) introducing a loyalty programme,” Bank of America Merrill Lynch analysts wrote in a research note.

While the company is ramping up investment on the one hand, it also plans to strip costs out of the business. Morrisons said that it will exit non-core activities, including Kiddicare and Fresh Direct, as well as lowering its capital expenditure programme. In total, the group expects to generate savings of GBP1bn over three years. 

Responding to the news, Jeffries analysts noted: “Price reinvestments will see underlying EBIT potentially fall by c.30% in 14/15, then rebuild strongly as opex savings come through… Repositioning aggressively on pricing follows an extended period of underperformance. The business recognises that its relative value positioning vs. purely price-driven competitors is detracting from the stores’ appeal, and will address this vigorously.”

Morrisons’ new strategic direction follows a year of declining like-for-like sales. In a trading update today the company reported a 2.8% fall in like-for-like sales, excluding fuel and VAT, for the 12 months to 2 February.

Competition in the UK retail sector has increasingly focused on price, with discounters Aldi and Lidl stealing market share from the multiples.

Last month, Tesco launched an incremental investment of GBP200m to drive prices down on “essential” items. Asda, the UK arm of Wal-Mart, said last November that it will invest GBP1bn in price and – reporting lower fourth-quarter sales last month – the group said it will also invest GBP250m in “quality, style and design”. 

Fears over a tit-for-tat price war have raised concern for the medium-term outlook for UK grocery retailers. Shares in Tesco, Sainsbury’s and Morrisons – the UK’s largest listed grocers – were down 4.33%, 7.28% and 8.33% respectively at 11.45 (GMT).

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