Analysts expect Asda to be the next major player to pull the trigger following Morrisons’ announcement of its latest round of cost cuts on Sunday, with selected meat and poultry prices slashed by 12 per cent.
The move marks Morrisons’ second post-Brexit price reduction after cutting prices on more than 1,000 products by an average of 18 per cent at the start of August.
It has prompted speculation over a fresh price war between major supermarkets Morrisons, Tesco, Asda, Sainsbury’s and discount grocers Lidl and Aldi.
“The next in line to cut prices significantly will be Asda,” Nicla Di Palma, an equity analyst at wealth manager Brewin Dolphin, said.
“They have been a big market share loser in the past 18 months and Walmart, the parent company, have deep pockets and will want to invest in prices,” Ms Di Palma added.
Asda’s market share was last calculated at around 15.5 per cent, compared to Morrisons at 10.5 per cent, Sainsbury at 16 per cent and Tesco around 28 per cent, according to Kantar Worldpanel.
The grocer’s new CEO, Sean Clarke, may embark on a “sophisticated strategy” involving a “big refresh” of existing stores and products - but cost cuts will be a faster-acting cure, Ms Di Palma said.
Asda last month reported its worst quarterly performance on record, posing a 7.5 per cent fall in like-for-like sales in the second quarter.
Clive Black, retail analyst at Shore Capital, agreed that Asda and Tesco are likely next to drop prices. However, he stressed that cuts alone will not win over British shoppers.
He noted that Morrisons boss David Potts has “delivered a revolution” over the past year, in part by focusing on a package of improvements beyond price tags.
“If Morrisons’ strategy was just about price, it wouldn’t have made the progress it has over the last 12 months,” Mr Black said, pointing to the company’s focus on merchandise, advertising, marketing and the overall shopping experience.
However, a weaker pound could ultimately push up costs in the months ahead. Sterling has fallen about 11 per cent against the US dollar since the EU referendum, and more than 9 per cent against the euro.
The weaker pound will raise the cost of food imports, which will hurt the already-low profit margins of the UK’s major grocers.
“It would be natural to expect the supermarkets to try to pass on those to consumers as the operating margins are already thin and the supermarkets can’t really afford to make even less money, or even lose money,” Ms Di Palma said.
“It is worth noting that Morrison’s ‘Price Crunch’ is for a minimum of three months’, according to Morrison’s release. Hence, Morrisons has some leeway to increase prices if input costs rise,” she said.
Morrisons is set to report second quarter earnings on September 19.