As the UK’s largest retailer Tesco starts to win back ground in the fight against the discounters Lidl and Aldi, Morrisons (LSE: MRW) and Sainsbury’s (LSE: SBRY) are still struggling to turn things around.
Sainsbury’s in particular is still reeling from its poor Christmas trading performance. The grocer’s sales at stores open at least a year fell 1.7% excluding fuel in the 14 weeks to 3 January, the first such decline in a decade. Total sales fell 0.4%.
And management warned alongside these results that the tough trading conditions seen over Christmas would continue into the first half of this year. Data from market research firm Kantar Worldpanel has already shown that, in the 12 weeks to 1 February, Sainsbury’s sales declined by 1%.
Funding cuts
Morrisons fared slightly better than Sainsbury’s in Kantar’s study. For example, Morrisons’ sales for the 12 weeks to 1 February only contracted by 0.4% as the company’s price cuts started to draw customers back to the group.
The question is, how much longer will these positive sales trends last? Sainsbury’s is setting aside £150m to fund lower prices but this total is around half of what Morrisons plans to spend.
Specifically, Morrisons plans to spend £1bn over the next three years to fund price cuts. Additionally, the UK’s third largest supermarket, Asda, is planning to spend £300m in the first quarter of 2015 on reducing prices across 2,500 of its best-selling lines.
However, the threat from Tesco is a different kettle of fish entirely. Not only is Tesco still generating over £1bn in annual profit to fund price cuts but the company is also slashing costs, aiming to save £250m per annum to fund additional price cuts.
Most potential
Nevertheless, in terms of size relatively to market share, Morrisons’ round of price cuts looks to have the most potential. With a market share of 11.3%, Morrisons plans to spend around £330m per year reducing prices, roughly £29.2m per 1% of market share.
Using the same metric, Sainsbury’s is only planning to spend around £8.9m per 1% of market share on cutting prices. Using this metric, it’s quite clear to see that Morrisons is pumping more money into cutting prices than Sainsbury’s.
Moreover, within the past week, Morrisons has unveiled a new show-stopping round of price cuts. The retailer has revealed that it is going to slash prices by up to 56% in a renewed attempt to claw back customers.
More than 130 staples will be reduced by an average of 22%. The price of eggs, bread, milk, butter, coffee, sugar, fruit juice and pasta will fall by up to 56%. These cuts seem to be part of management’s new “back to basics” approach that Morrisons has adopted in an attempt to win back shoppers who have defected to the discounters.
The bottom line
All in all, the figures seem to suggest that Morrisons is working harder than Sainsbury’s at trying to win back customers. The retailer is spending more per point of market share on cutting prices and, according to Kantar’s data, this is already starting to have an effect on sales.
But there’s still a certain amount of uncertainty surrounding the supermarket sector, which is why I sold my Morrisons holding earlier this year and started looking for opportunities elsewhere…
