The grocery industry has been bracing itself for a price war since mid-March. Dalton Philips revealed at the Morrisons prelims plans to halve its profits forecast for the year ahead to around £350m as it invested £1bn in price and ranging over the next three years.

But until this week it was hard to see where the £300m Philips had earmarked for this year was being spent as, in the following weeks, price cuts at Morrisons were limited to a handful of fresh produce lines each week, along with a few basics like milk and bread.

However this week we finally saw what all the fuss was about as Morrisons introduced permanent price cuts on 1,200 everyday essential items, with an average saving of 17% and some items down by as much as 60%.]

Integrated supply chain

The price cuts will aim to take advantage of its integrated supply chain, with the majority of savings on on fresh food and Morrisons own-label lines.

Of the own-label price cuts announced so far, own-label British beef mince 500g was cut from £2.49 or two for £4 to £1.99 or two for £3.50, and Morrisons foil (30m) was cut 48% to £1.99.

But branded lines will still account for between 35% and 40% of the savings. For example, Diet Coke 8-pack will come down from £4.39 to £2.64, Jammie Dodgers down 55% to 49p and Huggies Wipes down 60% from £2.49 to just £1.

Yet Philips insists this is not the start of a price war, hailing the latest move as its “declaration of independence”.

“This is not a temporary skirmish or a response to just one channel,” he explains. “It is about firmly re-establishing our credentials as a value-led grocer with a passion for food in a rapidly changing market. In doing so, we are strengthening trust with consumers tired of the phoney tit-for-tat price wars and claims that don’t stand the test of time.”

Still, it is hard to see its big four rivals simply letting it move to a cheaper pricing position without some kind of response.

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Morrisons has already guided the City on the impact of its pricing investment, while its rivals have not yet said how they plan to respond, which is why shares in Tesco and Sainsbury’s fell more sharply than Morrisons’ in early trading on Thursday as the extent of the cuts became known.

A note from HSBC Global Research said that rivals would get sucked in. “The discounters and Asda will almost certainly respond, and we expect Tesco to increase its price commitment beyond the £200m recently pledged. (Morrisons’ investment is equivalent to Tesco pledging c£600m),” it states.

“Tesco has made a heavy investment in its petrol strategy and it may wait to see if this is an effective strategy before more price cuts. But ultimately, the petrol strategy must be as well as competitive prices, not instead of them. If Morrisons is leading the market down, Tesco must follow, and then by default, Sainsbury’s.”

Shore Capital’s Clive Black reiterated his believe that Morrisons’ move will act as a contagion among rivals and suggested that it made Tesco’s pricing activities look “half-hearted”.

But Philips argues rivals might find it harder to respond to the move than some observers might think. He points to Morrisons’ vertical integration model as a reason why it has been able to make such sweeping long-term cuts. Morrisons makes 60% of the fresh food it sells, allowing it to “cut prices, not corners,” he says.

Grocery Insight’s Steve Dresser agrees rivals will certainly be put on the back foot by the boldness of this move. “Asda will have money in the arsenal to compete from Walmart, it always does. Tesco has already invested £200m and if we believe that a lot of this was tied up with milk, how likely will it be to go further,” he argues. “The retailer I think with most to lose, however, is Sainsbury’s, given its recent sales performance and tighter trading margin.”

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