After months of will-they-wont-they speculation, this week Morrisons (LSE: MRW) has kicked off the grocery sectors newest price war as the group looks to reverse the gains made by Aldi and Lidlover the past few years.
Morrisons is the UKs fourth largestsupermarket chain by market share and has, in the past, been known as one of the countrys 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 ofessential meat and poultry products such as whole chickens and topside steak by 12%. But the price cuts dont stop there. The group is also cutting the prices of30 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 hasreduced prices on more than 4,435 products putting pressure on its rivals to follow suit. The companys closest listed peers, Tesco (LSE: TSCO) and JSainsbury (LSE: SBRY) have struggled to keep up. However, so far the price cuts havent translated into higher sales figures for Morrisons, partly due to store disposals and general food deflation, two negatives thatare currently outweighing sales growth.
Market share figures fromKantar Worldpanel, for the 12 weeks ending 19 June show total supermarketsales 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 Sainsburys theyfell by 1.4%, although after Sainsburys acquisition of Argos owner Home Retail earlier this year, these figures dont wholly reflect the companys 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 profitabilityplunging and with todays announcement, theres 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 sterlings weaknesssince Brexit, retailers will see their already razor thinmargins squeezed even further.
Whats more, shares in Tesco, Morrisons and Sainsburys are relativelyexpensive 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.
Sainsburys 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 Sainsburys 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.
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Rupert Hargreaves 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.