Will Morrisons’ new price war derail Tesco and Sainsbury’s recovery?

After months of will-they-won’t-they speculation, this week Morrisons (LSE: MRW) has kicked off the grocery sector’s newest price war as the group looks to reverse the gains made by Aldi and Lidl over the past few years. 

Morrisons is the UK’s fourth largest supermarket chain by market share and has, in the past, been known as one of the country’s most value-orientated chains. Now the group is trying to return to its roots and the latest attempt by management to bring in shoppers is further price cuts.

Specifically, Morrisons’ management announced yesterday morning that the group is slashing the price of “essential” meat and poultry products — such as whole chickens and topside steak — by 12%. But the price cuts don’t stop there. The group is also cutting the prices of 30 fruit and vegetable products and back-to-school lunchbox products in an attempt to bring parents back into stores. 

Price war 

So far this year Morrisons has reduced prices on more than 4,435 products putting pressure on its rivals to follow suit. The company’s closest listed peers, Tesco (LSE: TSCO) and J Sainsbury (LSE: SBRY) have struggled to keep up. However, so far the price cuts haven’t translated into higher sales figures for Morrisons, partly due to store disposals and general food deflation, two negatives that are currently outweighing sales growth. 

Market share figures from Kantar Worldpanel, for the 12 weeks ending 19 June show total supermarket sales fell by 0.2%, as like-for-like grocery prices declined by 1.4% on last year. Sales at Tesco dropped by 1.3%, at Morrisons sales dropped by 2.4% and at Sainsbury’s they fell by 1.4%, although after Sainsbury’s acquisition of Argos owner Home Retail earlier this year, these figures don’t wholly reflect the company’s fortunes. 

Investors will feel the pain 

The way the UK supermarket sector has acted over the past two years should be a warning to investors that it might be wise to avoid the sector. Constant price wars and loss of market share has sent industry profitability plunging and with today’s announcement, there’s no end in sight to the deteriorating profitability of the largest retailers.

Ultimately, this will hit investors the hardest. Along with increasing employee costs and higher import costs as a result of sterling’s weakness since Brexit, retailers will see their already razor thin margins squeezed even further. 

What’s more, shares in Tesco, Morrisons and Sainsbury’s are relatively expensive compared to the wider market and the dismal outlook for the sector. For example, shares in Tesco are trading at a 2017 P/E of 27 and shares in Morrisons are trading at a forward P/E of just under 20. 

Sainsbury’s is the only one of the trio trading at an attractive valuation. Shares in the company currently trade at a forward P/E of 10.8 and support a dividend yield of 4.9%. It seems the market is still waiting to see if Sainsbury’s acquisition of Home Retail was a sensible decision or a huge waste of money.  

Overall, the supermarket sector is currently plagued by uncertainty, it might be best for investors to stay away.