Supermarket Price War Analysis

Grocery price war and supermarket biggies, the key impact and changes on their operational background

A price war is an outcome of a business decision and the lowering of the prices of the products in relation to those of the direct competitors in a market. The competitors, in turn, may further lower the prices of their products as a response, an initial strategy or use a defensive strategy to protect their market share. The grocery price war among the supermarket biggies began more than a year ago. The price war is mainly prevalent in the UK due to the rising tendency of consumers to shop at the online and discount stores. Televisory analysed the supermarkets in the UK during the price war. Morrisons and Sainsbury’s were actively involved

The companies involved in the price war can take steps to curtail their Selling, General and Administrative (S, G & A) expenses to improve their performance. If the company’s pricing strategy succeeds, the company will earn good operating profits. However, if it fails, the curtailed and well planned S, G & A expenses will help the company mitigate the competition risks. The lower S, G & A expenses as a percentage of revenue indicates a better performance. Sainsbury’s already had much lower S, G & A expenses as a percentage of its revenue than that of Morrisons. However, Morrisons was successful in reducing its S, G & A expenses as a percentage of its revenue by decreasing its employee expenses. The company hired 5000 new sales employees at relatively lower wages and laid off the employees at the leadership and management level, this effectively reduced its employee expenses. Morrisons also closed down its underperforming stores and focused more on the better-performing

Source: Televisory’s Research

The likely motive of the price war is to end the competition and create monopoly or oligopoly in a market by a firm. However, the company may not be successful in achieving this goal. The price war can be a long-term game, which requires a good strategy for survival. The companies can survive if they have a lean cost structure in this game. The company needs to keep a check on its selling, general and administrative (S, G & A) expenses during the phase. The company can also provide some kind of differentiation in the period although this is restricted by a limit. Morrisons improved its customer service and store experience by reducing the waiting time in a queue.

A company involved in a price war may have to bear the loss and requires investment for sustenance. The company that can withstand a loss, can also survive during the price war. Morrisons had a low value of EBITDA per square foot, compared to its peers, yet it entered into the price war owing to its high debt service coverage ratio as shown below. Source: Televisory’s