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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 to 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 as a defensive strategy to protect their market share. Globally, 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 in the price war, whereas Poundland Group and B&M Value Retail were comparatively passive and employed a defensive strategy. The key impact and changes on the operational background of these companies during the price war are enumerated below.

  • The price war helped Morrisons and Sainsbury’s to increase their foot-traffic and sales volume as was evident from their inventory turnover periods. Additionally, both the firms saw their inventory turnover periods falling whereas Poundland Group and B&M Value Retail saw their inventory turnover period increasing.

 

Source: Televisory’s Research

  • 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 ones. 

Source: Televisory’s Research 

  • The below graph portrays, the EBITDA per square foot for both Sainsbury’s and Morrisons was lower than that of the Poundland Group as of September 2014, quarter. However, it improved significantly for Sainsbury’s during the price war and was more than that of Poundland Group. Morrisons had a negative EBITDA per square foot at the beginning of the price war, but it, later on, turned out to become positive. This was because of the fact that the grocery price war resulted in a decline in average selling price of the products. Moreover, both Morrisons and Sainsbury’s had developed a strong and direct relationship with the farmers. Morrisons had its own team of butchers, fishmongers and bakers. On the other hand, Sainsbury’s rationalised its suppliers count from 3,400 to 3,000. One of the steps taken by Morrisons to improve operational efficiency was to decrease this processing and manufacturing costs. The in-house core competencies for backward integration can also help the company in this process. Few supermarkets make semi-cooked products and bread in-house and this helps them save costs. The supermarkets can improve their results during the price war by including a broader mix of products. While keeping products that are subject to price fluctuations in the market, they can also keep high-end products that will sell at a premium and will not be affected by the price war. Although B&M Value Retail had lower sales volume during the price war, its EBITDA increased as a result of the above strategy.

 

Source: Televisory’s Research

A price war of this kind requires a high working capital and investment. The supermarkets can improve their operating profit by negotiating better terms with their suppliers and having an optimised logistics and distribution network. All the companies, stated above have been successful in getting favourable payment terms from their suppliers. This is also depicted by the below graph, which shows a steep increase in the trade payables turnover period in September 2015, compared to their values in 2012 and 2013.

Source: Televisory’s  Research 

The decreased inventory turnover period and increased trade payables turnover period have resulted in further reduction of the cash conversion cycle for the companies actively involved in the price war, as shown beneath.

Source: Televisory’s  Research

The likely motive of the price war is to end the competition and create a 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 did this by improving 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  Research

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