Morrisons: are more price cuts the answer?

Is it cheap enough to be attractive?

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Inside A Morrisons M Local Supermarket

Morrisons has announced its latest attack in the Great British Supermarket Price War: it is cutting the price of another 135 Morrisons products by an average of 14%. It had already announced £1 billion of cuts over three years - and details of the first round of those cuts in May when 1,200 'everyday essentials' were cut by an average of 17%.

So will these cuts save the supermarket?



Troubles

Morrisons has had a torrid time recently. Profits at the supermarket have fallen from £901 million two years ago to £375 in the current year - that constitutes the kind of disaster that requires immediate action.

The experts blame three forces: the first is the fact that it was so late to expand into the convenience market. The second is the fact that it was so late to online shopping - announcing a joint venture with Ocado years after its rivals had established strong offerings. And the third is the rise of the discounters.

The discounters are taking vast swathes of market share from all of the big players: last year Aldi's share of the market rose from 3.5% to 4.7% and Lidl saw its share rise from 3% to 3.6%. Aldi saw astonishing sales growth of 35.9% last year - while at the same time Tesco saw sales fall 3% and Morrisons 4%. The rise of the discounters looks set to continue - with Aldi recently announcing plans to double its stores to 1,000 in the next seven years.

Meanwhile, another player is set to enter the world of UK discounters: last week Sainsbury's announced a partnership with Denmark's Netto to launch discount stores in the UK, so those who want discount shopping will have more choice than ever.

Morrisons has decided that the best way to see off this threat is to cut prices. In March it announced that £1 billion would be invested in price cuts. The strategy is to try to position itself at the bottom of the price range - with permanent discounts. It will aim to be the shop of choice for those who want cheap prices without going to a discounter.

Will it work?

There a few flies in the ointment. There are those who argue that some of these price cuts are just the supermarket catching up with everyone else on price - and some prices are still way above the rest of the big four. So, for example, for four pints of own-brand milk you would pay £1 at Asda, Sainsburys and Tesco and £1.39 at Morrisons. At Aldi, meanwhile it's 95p.

There are also those who point out that the position Morrisons is aiming for is already ably occupied by Asda. It was way ahead of the game when it established Everyday Low Prices last autumn. Its price Guarantee also promises to be 10% cheaper than its rivals - which means it's a firm favourite for bargain-hunters.

There are analysts who highlight that the other big players are joining the cost-cutting frenzy too - and have more buying power to enable them to compete harder. Tesco has already cut a swathe of prices and there could be more soon in response to this round of cuts.

Finally, the analysts warn that lower prices will not be sustainable for long at Morrisons before investors are unwilling to accept the lower profits they will bring. Unless they can be matched by cheaper procurement (which is difficult for a firm with less buying clout) the business could run into a brick wall on pricing.

So what do you think? Will this move rescue Morrisons, or could we see the end of the brand?