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.

Investments

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.

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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.

At first glance, it might seem preposterous to draw parallels between an oil and gas firm, a diversified natural resources producer and a power systems manufacturer. But all three of these companies are being hampered by similar macroeconomic conditions — specifically, unfavourable commodity prices.

BHP Billiton

BHP Billiton has shed 35% of its value since August, as illustrated below:

With its enormous exposure to the iron ore market, it’s no surprise that much of the company’s fate is tied to the commodity’s price.

China’s rapid industrialisation in the last decade fuelled an unprecedented demand for BHP Billiton’s products. As Chinese villagers migrated to cities, the country needed huge amounts of steel to build critical infrastructure such as office buildings and apartments; the need for steel meant a need for iron ore, and this seemingly once-in-a-lifetime spike in demand lured new producers into the market and incentivised existing players to expand capacity far beyond the commodity’s long-term average.

Today, China’s economy is slowing. Demand for iron ore is waning. Prices are at a six-year low, and BHP Billiton has been feeling the pain. With high fixed costs and revenues exposed to the wild fluctuations in commodity prices, the company’s margins are vulnerable, and chief executive Andrew Mackenzie doesn’t expect much to change in the near term:

“At today’s lower rates of demand growth, incremental supply will take longer to absorb. In this environment we are well prepared for the possibility of an extended period of lower prices in several commodities.”

The current situation may seem dire, but the company is well positioned to ride this out. Low commodity prices are squeezing all producers; if the rates aren’t high enough to sustain operations, it will be the higher-cost producers that cease production first. With its scale, expertise and favourable position on the cost curve, BHP Billiton should be able to ride out this storm.

Rolls-Royce and Royal Dutch Shell

Royal Dutch Shell and Rolls-Royce have likewise suffered the pain inflicted by falling commodity prices. Royal Dutch Shell’s first-quarter 2015 profits nosedived in the wake of collapsing oil and gas prices. S&P cited the slide in commodity prices as a primary reason for downgrading the company this week, and the stock has dropped 25% since last September, as below:

Rolls-Royce’s exposure to commodity prices has been more indirect. The company’s performance is linked to the health and condition of its customers, and those firms have not been faring well. The precipitous drop in oil prices has meant reduced capital investment of Rolls-Royce’s oil majors. The company’s mining customers have reduced their consumption as core commodity prices have plunged. Over the course of 18 months, Rolls-Royce has issued multiple profit warnings, replaced its CEO, scrapped its share buyback programme and lost 40% of its value.

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

Kingfisher

Europe’s largest retailer of DIY home improvement products, Kingfisher (LSE: KGF) has struggled with weak demand in the French market, loss-making stores and uncooperative divisions. While former CEO Ian Cheshire held his title during a time when the company’s share price more than doubled, like-for-like sales were disappointing and the business had not been able to fully exploit huge opportunities in the UK housing market.

Significant changes were needed. Castorama chief executive Véronique Laury replaced Cheshire as group CEO this year, and the firm has put forth several initiatives in an effort to cut costs and spur demand. Inventory management is currently under scrutiny. Only 7,000 of its nearly 400,000 stock-keeping units (SKUs) are being sold at more than one of Kingfisher’s top five operating companies. This substantial inefficiency, Laury says, stems from a silo structure that breeds poor inter-company co-ordination. By restructuring its divisions, unifying corporate activities and standardising shared processes, the company hopes to leverage the company’s underutilised scale.

Kingfisher believes its customers are too limited in their shopping experiences. Instead of solely offering a traditional in-store format, the company is investing heavily to provide additional channels – web and catalogue sales – through which customers can conveniently make their purchases. If successful, Kingfisher can stimulate sales growth, curtail its fixed expenses and improve its margins.

Morrisons

Britain’s fourth-largest supermarket chain Morrisons (LSE: MRW) sacked its CEO in February. During Dalton Philips’ five-year tenure as chief executive, Morrisons’ performance has been truly dreadful. Like-for-like sales have plummeted, return on capital employed has deteriorated and market share has waned.

Morrisons has relentlessly pointed to outdated IT systems and difficult economic conditions as reasons for its misfortune. In a bid to stem the exodus of patrons, the company began providing additional channels – online and convenience sales – through which customers could shop. Both initiatives resulted in disastrous performance. With its managers’ negligible experience in the online grocery marketplace, Morrisons chose to acquire a company that perhaps knew a bit more. In 2011, Morrisons bought a nursery supplies retailer for £70m; of the acquisition price, £24m related to goodwill, which Morrisons claimed was an amount worth paying to educate senior managers about the e-commerce business. Morrisons sold this business in 2014 for £2m.

For the past half-decade, each of Morrisons’ annual reports describe largely the same corporate goals – to capture growth through e-commerce and convenience stores; to fuel sales volume by cutting prices; and to expand the scope of vertical integration by sourcing and processing food through Morrisons’ own facilities. Three months into his role, CEO David Potts has yet to announce any significant deviation from these strategies. And that presents an interesting opportunity for investors – with low expectations and a share price beaten down by the market, some new idea – any new idea – could be a catalyst of resurgence.

Tesco

Tesco (LSE: TSCO) shareholders have had to endure a wild ride over the past few years. During a calamitous period that included falling turnover, tumbling like-for-like sales performance and an accounting scandal that led to the suspension of four senior executives, shares have been bid down to levels not seen in more than a decade. Tesco sacked its chief executive last July and, since taking the reins in September, Dave Lewis has been trying desperately to steer the juggernaut away from further troubles. Under his direction, Tesco’s major strategic initiatives include downsizing the product ranges, boosting the availability of the most popular products and prioritising the UK business. So far, so good. While the credit may not be solely due to these initiatives, the decline in like-for-like sales is slowing and investors are becoming increasingly optimistic about the company’s outlook: shares have rallied 20% since hitting a decade-long bottom last December.

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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.