1 Huge Problem For Tesco PLC, WM Morrison Supermarkets PLC & J Sainsbury plc

UK supermarkets Tesco PLC (LON:TSCO), WM Morrison Supermarkets PLC (LON:MRW) and J Sainsbury plc (LON:SBRY) are faced with a huge risk that could damage profits. What does this mean for investors?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Prices are being slashed at Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY) and WM Morrison Supermarkets (LSE: MRW). Scrambling to respond to recent trends of tumbling like-for-like sales, worsening profits and dwindling market share, these retailers hope to turn their fortunes around by wielding a non-exclusive, unexceptional competitive tool: the labelling gun.

They cite as a primary concern the rise of discounters such as Lidl and Aldi, which have been rapidly gaining market share in the UK. In a desperate attempt to staunch the outpouring of customers, the three biggest conventional UK supermarket chains have committed to investing hundreds of millions of pounds in price cuts.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!


In fiscal years 2014-15, Morrisons spent the bulk of £315m to reduce charges on 1,700 items by an average of 17%; Sainsbury’s has touted price decreases on 1,100 items; and Tesco has lowered prices across several ranges. All three grocers say these cuts are permanent. Effectively, they have initiated an “everyday low-pricing” strategy, whereby goods are priced extremely competitively and are kept low for sustained periods. To make this pledge concrete, the grocers have each launched their own price-checking tools that enable customers to compare baskets of goods with, at minimum, the top three competitors.

Tesco’s Price Promise programme will match items to comparable goods at Asda, Sainsbury’s and Morrisons using daily or bi-weekly price updates. If the Tesco shopper’s basket costs more than the competitors’, Tesco will offset the difference by providing a voucher. Sainsbury’s launched a similar scheme. Morrisons’ Match & More will reward shoppers with loyalty points that eventually translate into vouchers. These programmes are meant to negate any excuses a customer might have to shop elsewhere, and they might benefit the few shoppers who use them.

But this strategy is problematic. Unless Tesco, Sainsbury’s and Morrisons revamp the entirety of their store strategies – which currently emphasise service, range and quality – they will be poor competitors in a game perfected by the budget retailers. These strategies require higher spending needs that discounters have largely avoided. At Aldi, for example, customers are not provided the luxury of free carrier bags; customers bring their own. Stores are not designed to exude a comforting, relaxing quality; what matters is operational efficiency. Products are displayed inelegantly, with items remaining in their shipping cartons until the very end of their journey, when they’re plucked out by the customer for purchase. Reducing the handling of merchandise reduces labour costs. By restricting its hours of operation to peak times only, Aldi lowers labour and energy expenses. The services provided are minimal, the selection is slim, and the company’s concern for quality is secondary to its concern for price.

Tesco wants to improve service, not reduce it – the company has been hiring thousands more client-facing personnel. Sainsbury’s has proclaimed, “Our investment in quality where it matters to our customers is at the heart of our strategy”. Morrisons has expressed the need to “improve the small details of the customer shopping experience”. These are noble objectives, but they contradict the companies’ primary strategy of price deflation. To be a low-price leader, the companies need to be a low-expense leader.

Industry Destructiveness

Even if the grocers could compete effectively with discounters, it still probably wouldn’t be a particularly good idea. Intense competition based solely on price can be destructive to the industry. When a grocer attempts to poach customers by waving the ‘lowest cost, highest value’ flag, it’s visible to all competitors, and retaliation can be nearly instantaneous. Through successive rounds of price cuts, in this zero-sum competition, margins for all grocers can get crushed. The only players that come out ahead in this game are the customers.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

R.D. Greengold has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

A beach at sunset where there is an inscription on the sand "Breathe Deeeply".
Investing Articles

Stock market crash: here’s why falling prices is good news

Over in the US, a stock market crash is battering high-priced stocks. But I see falling shares as an opportunity…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

These 5 FTSE 100 shares crashed in 2022. I’d buy 1 today

Although the FTSE 100 index is flat in 2022, some Footsie shares have crashed hard this year. But I see…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How investors can boost their passive income when the FTSE is falling

Stock markets are plagued with fears right now. Here's why I firmly believe those fears improve our passive income prospects.

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Investing Articles

2 cheap UK shares to buy right now!

Recent market volatility means many top stocks now trade at rock-bottom prices. Here are two cheap UK shares I'm thinking…

Read more »

Rolls-Royce's business aviation engine, the Pearl 700
Investing Articles

The Rolls-Royce share price is just pennies. Am I missing something?

As the Rolls-Royce share price lingers in penny stock territory, our writer revisits the investment case that has attracted him…

Read more »

Compass pointing towards 'best price'
Investing Articles

How to put a valuation on the Woodbois share price

The Woodbois share price has fallen from its recent spike, so should I buy now? And how can I work…

Read more »

Inflation in newspapers
Investing Articles

I’d fight inflation with these 2 FTSE 100 dividend shares

With inflation hitting a 9%, I'm boosting my passive income and turning to these two FTSE 100 dividend stocks.

Read more »

New Ways of Investing - Hands Only Using Smart Phone
Investing Articles

2 cheap Footsie stocks to buy for BIG dividends!

The recent stock market sell-off leaves plenty of top stocks looking too cheap to miss. Here are two great Footsie…

Read more »