Lidl and Aldi pose 'biggest supermarket threat ever'

Morrisons declares high-risk £1bn price war after plunge into red

(Getty Images)

The boss of Morrisons has declared the competition from discount grocers Lidl and Aldi have thrown the supermarkets industry into its biggest crisis since its birth in the 1950s.

The chief executive Dalton Philips was speaking as he admitted to a £176m pretax loss for the past year and vowed to throw £1bn into cutting prices, sending shares in Tesco and Sainsbury plunging.

His radical shift in focus to attack the two German incomers was supported by the board and he was given the full backing of his chairman, Sir Ian Gibson, although some investors were less convinced.

That Morrisons needs to do something radical was clear in annual figures showing a 2.2 per cent fall in like-for-like sales, a 13 per cent fall in underlying profits. Its share price has fallen more than a fifth in the past six months. They fell 6 per cent to 218.9p yesterday.

A £903m writedown was taken on its property portfolio, IT costs including getting its online operation with Ocado off the ground, and a £163m hit to offload its loss-making baby superstore business Kiddicare.

Mr Philips said: "Today is an important day. We are facing some big structural changes and it is the biggest challenge facing the industry since the 1950s and the advent of the supermarket."

To tackle the shocking results – which also saw a second profit warning in as many months for the coming year's profits – he said the Bradford-based company would challenge the discounters with price cuts, convenience stores and an online offering and its first loyalty card – although in reality most of this is simply catching up with its traditional rivals.

Mr Philips added that the shift of consumer spending to Aldi and Lidl was no longer cyclical but structural, a view that was shared by the City yesterday. But some investors are clearly concerned about a potential price war among traditional retailers to catch up with the discounters. Shares in rivals Tesco and Sainsbury's fell by 4.9 and 7.3 per cent.

Morrisons' move would accelerate a race that has already started, with Tesco announcing a £200m investment in price cuts two weeks ago. Asda is investing £1bn over five years in price cuts, and even Waitrose has more "essentials" lines.

Jon Copestake, a retail analysts at the Economist Intelligence Unit, said: "Morrisons are seeking to recognise the impact of discount channels [but] tighter margins and lower prices will dent profitability and could undermine some goodwill towards the brand.

"There is also a risk of price wars with the likes of Aldi and Lidl that could prompt a damaging race to the bottom."

Darren Shirley at Shore Capital warned: "Other supermarkets cannot stand idly by and let a competitor steal a march and so for Asda and Tesco in particular there may be concern as to what Morrisons is doing. The scope for contagion on the pricing front is high."

Racing to the bottom: The cut-price fightback

Morrisons

Spending £1bn over three years to bring down prices. Sketchy on details, but likely to be on fresh and own-brand produce.

Tesco

Will invest £200m to cut prices of fresh produce such as cucumbers and milk. Investing in fuel saving scheme and online.

Sainsbury's

Hoping to win more shoppers with more convenience stores. Justin King, chief executive, has dismissed the threat from discounters, saying Sainsbury's has greater range and quality.

Waitrose

Not immune to the discount threat. Winning new customers with loyalty card and free coffee. Essentials range increased to 2,100 lines.

Asda

Battling discounters hard, with £1bn to be spent on price cuts over next five years and £250m improving its own-label quality and packaging.