Morrisons (LSE: MRW) and Sainsbury’s (LSE: SBRY) have begun their fight against the discounters, Aldi and Lidl. However, both companies are using different strategies.
Morrisons is slashing prices, while Sainsbury’s has inked a joint venture deal with Danish discount chain Netto.
Price cuts
Morrisons is trying to beat the discounters at their own game by slashing its own prices. The company, which has come under fire from investors, including the founding family, announced a round of price cuts over the weekend. Morrisons cut prices on 135 everyday products, which will see their prices drop an average of 14%. Part of a £1bn package to cut prices.
This new round of cuts follows an earlier round of cuts, announced before the release of the company’s disastrous set of first-quarter results. The earlier round of cuts, described by Morrisons’ management as the group’s “big bazooka”, saw the prices of everyday essentials fall around 17%.
However, these cuts may be too little too late.
Indeed, according to research conducted by the BBC, when Morrisons’ first round of price cuts took effect, the company was only playing catch-up. For example, even though the group cut the prices on some products by as much as 60%, this only brought their prices into line of those at Tesco (LSE: TSCO) and Asda.
So, these cuts, although drastic, might not be enough to return Morrisons to health.
If you can’t beat them join them
Sainsbury’s has taken a different approach to fighting the discounters. The company has inked a £13m joint venture with discount chain Netto.
Initially, the venture will see five new Netto stores opened by the end of this year. In total, the venture is targeting 15 new stores across the north of England, a region where Sainsbury’s is underrepresented. I’ve covered the Sainsbury’s/Netto deal in more detail here.
Under pressure
However, as Sainsbury’s and Morrisons take action against the discounters, Tesco has not taken any significant steps to assert its authority over the sector.
Unfortunately, after reporting the worst trading performance in 40 years, the company is now facing significant pressure from investors to take decisive action. Investors have criticised the company’s tiny £200m worth of price cuts announced earlier this year.
Investors and the City believe that the company should cut its profit margin, from 5%, to 2% or even 1% across the board, to appeal to shoppers.
Sadly, these demands have already claimed the head of finance director Laurie McIlwee. He announced his exit after being attacked for promising to stick to unrealistic high margins, rather than cutting prices to challenge the discounters.
So, as Tesco’s struggles, investors both large and small alike are asking, “is this the end of Tesco”?