Waitrose has previously been one of the winners of a sharp polarisation in the market that has seen premium-end grocers as well as budget stores Aldi and Lidl gain share at the expense of the "big four" grocers - market leader Tesco (>> Tesco PLC), Wal-Mart's (>> Wal-Mart Stores, Inc.) Asda, Sainsbury's (>> J Sainsbury plc) and Morrisons.
But, as Britain's 174 billion pounds ($283 billion) grocery market grows at its slowest pace in a decade, new figures showed an escalating price war is hitting profits across the industry.
At the same time the sector is seeing lots of structural changes. Consumers are shopping around to save money and are wasting less, shying away from big weekly shops in large out-of-town stores and buying more in local convenience stores or online.
Waitrose posted a 9.4 percent drop in first-half operating profit, partly because it had to cut prices to remain competitive, while at Morrisons (>> Wm. Morrison Supermarkets plc) pretax profit slumped 51 percent as price reductions bit into margins.
Ocado (>> Ocado Group PLC) - the online retailer that serves both Waitrose and Morrisons - said it had seen the high street trend of buying less and more often start to spread to Internet shopping.
Its average spend dropped by 1.7 percent, although Ocado said that was balanced out by more people shopping on its site.
Waitrose's market share has increased by 10 basis points to 4.9 percent over the past year, but that growth is dwarfed by the gains at discounters Aldi [ALDIEI.UL] and Lidl [LIDUL.UL] - of 1.1 and 0.5 percentage points to 4.8 percent and 3.6 percent respectively, according to market researcher Kantar Worldpanel.
No.4 player Morrisons' share has fallen 0.7 percentage points to 11.0 percent.
Morrisons issued a big profit alert in March, while Tesco has issued two profit warnings in two months and has also parted company with its chief executive. Last month even Waitrose, which had previously seemed impervious to the industry's woes, warned of lower profits this year.
"The (grocery) trade has struggled with an amalgam of easing inflation, less fresh wastage in the home, more eating out in Britain and even moderate reductions in average calorific intake per capita," said Shore Capital analyst Clive Black.
CHALLENGING OUTLOOK
On Thursday Waitrose reported first half operating profit down 9.4 percent to 145.2 million pounds, as sales growth at stores open over a year slowed to 1.3 percent versus growth of 5.1 percent in the 2013-14 financial year.
"The outlook in the grocery sector remains challenging and we expect that to continue to be the case for some time," said the firm, part of the John Lewis Partnership [JLP.UL].
Waitrose said the profit fall reflected investment in new stores and refurbishments and in building online capacity, as well as in price cuts and promotions, required to allow it to compete effectively.
Rival upmarket food retailer Marks & Spencer (>> Marks and Spencer Group Plc) has not suffered the same pressure from discounters, because it sells mainly own-label produce, so only 10 percent of its food catalogue is directly comparable with the core products of the "big four" grocers.
Morrisons, which has also suffered because it lagged rivals in entering fast-growing online and convenience store markets, saw its first half underlying pretax profit slump 51 percent to 181 million pounds, as like-for-like sales crashed 7.4 percent.
Ocado reported gross retail sales rose 15.5 percent in its fiscal third quarter.
"I don't think anything will get particularly easier in the broader market in the foreseeable future ... over time we'll continue to grow and it will get more and more difficult for bricks and mortar," chief financial officer Duncan Tatton Brown told Reuters.
CUTTING PRICES
Morrisons said its 1 billion pound recovery plan was beginning to resonate with shoppers.
The grocer said in March it needed radical action to meet the challenge of structural change. It set out a plan to try and restore its low-price image with shoppers and boost sales volumes by spending 1 billion pounds, mainly on cutting prices over the next three years.
"Everything we've seen in the sector since March has made us more confident that we made the right call at the right time," Chief Executive Dalton Philips told reporters.
He has cautioned that sales at stores open over a year will take time to improve as lower prices reduce actual cash sales going through the tills before volumes improve.
"The experience from all the other large retailers that have done this - Delhaize (>> DELHAIZE GROUP), Carrefour (>> CARREFOUR), Kroger (>> The Kroger Co.), Ahold (>> KONINKLIJKE AHOLD) - is it takes time," said Philips.
All those grocers have had some success moving away from a focus on promotions to a broader lower-priced position.
In France Carrefour, after years to losing market share to Leclerc, significantly reduced its promotional intensity and instead cut prices on thousands of branded items, recovering market share, while in the United States Kroger has been the only major grocer to withstand pressure from Wal-Mart.
Morrisons did maintain its guidance for this financial year at 325-375 million pounds, down from 785 million pounds in 2013-14, and raised its interim dividend by 5 percent
Philips said there were some "encouraging initial trends", pointing to industry sales data for August, a reversal in the rate of decline in items per basket and a 30 percent rise in sales of products which had their prices cut by an average of 17 percent in May. He said the firm's initiatives would start to benefit its overall sales performance towards the end of the second half.
Shares in Morrisons, down 40 percent over the last year, closed up 0.7 percent, while Ocado's were up 0.3 percent.
In contrast to the tough grocery market, trading conditions in the non-food sector are more positive.
John Lewis's department store chain saw first half profit jump 62.2 percent, Next (>> NEXT plc), Britain's second biggest clothing retailer by sales value, posted a 19 percent rise in first-half profit, while Argos, part of the Home Retail Group (>> Home Retail Group Plc), reported a ninth straight quarter of like-for-like sales growth.
(Additional reporting by Kate Holton, Sarah Young, Paul Sandle and Emma Thomasson; Editing by Pravin Char and Mark Potter)
By James Davey
