Change of strategy at Morrisons

How can it be that the announcement from Morrisons today that they have made a £176m pre-tax loss for the year to February 2, has caused Tesco's share value to fall to its lowest level in almost a decade? There are a couple of articles here which give students a good opportunity to analyse the internal and external influences which are forcing Morrisons to change their strategy, and the effect of that change on their competitors. As this article in the Daily Telegraph explains, the problem for Tesco, and for Sainsbury as well, is in the change of strategy that Chief Executive Dalton Philips announced in order to try to turn this around. Morrisons intend to cut their costs aggressively, by £1bn, and to use those savings to cut their prices.

The expectation is that the other competitors in this oligopoly market will have to follow suit with similar price cuts, and that the result will be significant reductions in gross profit margins for all of them.

They will accompany this with clearer focus on their core business of food retailing, selling off baby equipment business Kiddicare, and focusing instead on their online food retailing market, with their joint venture with Ocado, in an attempt to cash in on the fast-growing online market.

The BBC's article says that Morrisons think they have identified a gap opening up, as the market changes, for a retailer to sit between the 'big four' retailers and the discounters, and that their new strategy is to move in to that gap. Belatedly, their are moving to offer online shopping, customer loyalty cards to enhance their understanding of the customers' preferences, and more targeted offers - which Tesco and Sainsburys have been doing for years.

Whether customers see a reason here to switch to Morrisons remains to be seen - the pre-tax loss means that they have to do something to try to turn performance around, and the view of the stock market is clearly that the threat of a price war has the potential to be very damaging for their major competitors. If they all feel the need to follow suit, the likelihood is that they will also simply end up with lower profits, but little change in market share, and can only survive if they cut costs to the bone. On the face of it, the customer may be the winner here, as long as the customer service levels can be maintained - what is the impact on the other stakeholders involved?