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UK grocer Morrisons threatens price war

London - Britain's Morrison Supermarkets sparked talk of an industry price war on Thursday after it posted its lowest profit for five years and said it would invest £1bn ($1.7bn) in price cuts over three years in a bid to recover.

Britain's No.4 grocer, which has been losing market share to discounters Aldi and Lidl and lagged rivals in entering fast-growing online and convenience store markets, said its profits would more than halve this year as it tries to restore its low-price image, sending its shares plunging to an eight-year low.

Shares in bigger rivals Tesco and J Sainsbury also fell heavily, with around £2bn wiped off the combined stock market value of the three groups.

Jefferies analysts said the scale of Morrisons' price investment was equivalent to "getting the bazooka out," while Phil Dorrell, director of consultants Retail Remedy, said it had raised industry fears of a profit-sapping battle over price.

Britain's "big four" grocers - Tesco, Walmart's Asda, Sainsbury's and Morrisons - are all being outpaced by sales growth at discounters in a fragile economic recovery, while upmarket chain Waitrose is also trading ahead of the pack.

Morrisons has fared the worst, however.

The group said it would help fund price cuts by raising £1bn from selling off peripheral properties over three years - a figure that may disappoint activist investors including US hedge fund Elliott Associates which have called for the firm to hive off real estate into a separate company.

Morrisons will also aim to reduce its cost base by 1 billion pounds, through operating improvements and lower capital spending, and exit non-core activities, including baby goods firm Kiddicare and its stake in US online grocer Fresh Direct.

"The strategy ... is a bold and comprehensive response to the fundamental structural changes that are taking place in grocery retail," said CEO Dalton Philips, who succeeded Marc Bolland, now boss at Marks & Spencer, in 2010.

Some investors remain to be convinced, though.

"It doesn't look great," said one top 50 shareholder in Morrisons on condition of anonymity. "The certainty with the strategy is that profits will be lower; what is less certain is that the lower prices will stem sales declines."

At 12:00 GMT, Morrisons shares were down 8.7% at 212.7 pence, having earlier dropped as much as 11% to an eight-year low of 207.3 pence. Sainsbury's shares were down 7.2%, and Tesco's 4.7% lower.

"More serious than thought"

"All of a sudden everybody has realised that it's more serious than first thought," said John Ibbotson, director of consultants Retail Vision, referring to the competitive challenges to the "big four" supermarket groups.

"It's now a long-term structural thing. The middle is shrinking and it will keep on shrinking ... It's hitting Morrisons worst because their position is worst."

Industry data earlier this week showed sales at discounters Aldi and Lidl surging 33.5% and 16.6% respectively, though they together only account for around 7.5% of Britain's total grocery market.

Morrisons said profit before tax and one-off items dropped 13% to £785m in the year to February 2, a second straight year of decline. Turnover fell 2% to £17.7bn, with underlying sales at stores open over a year down 2.8%.

The group warned underlying profit in 2014-15 would be in the range of £325-375m, which at the midpoint is less than half the level analysts were on average forecasting.

Philips would not be drawn on how long he had to deliver a recovery, merely stating: "This is the right plan and I'm focused on making sure we deliver."

He said he expected the plan to provide at least £2bn of free cash flow over the next three years.

Morrisons will invest £300m in 2014-15 to narrow the price gap with discounters and become a "value leader", a move that follows price initiatives from Tesco, Asda and the Co-op.

Philips said the customer response to initial price cuts had been immediate, noting that sales volumes of iceberg lettuces had jumped 70% after their price was cut.

"We're only scratching the surface (so far). Deep, wide and permanent price investment is coming to Morrisons," he said.

Bernstein analysts said the plan for limited property sales was a disappointment. "This is not as much as we would have wanted to have seen," they said in a research note.

After exceptional non-recurring costs of £903m including a writedown on underperforming businesses, sites it no longer intends to build stores on and mature stores, Morrisons made a pretax loss of £176m in 2013-14.

Despite the profit fall and warning, the group raised its 2013-14 dividend by 10% to 13 pence a share and committed to a 5% minimum rise in 2014-15 and a "progressive and sustainable" payout thereafter.

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