* 2013-14 underlying profit down 13 pct to 785 mln stg
* Sees 2014-15 underlying profit collapsing to 325-375 mln
* To invest 1 bln stg in cutting prices over three years
* To sell property, cut costs, exit non-core activities
* Shares fall as much as 13.6 pct, price war fear hitsrivals (Adds CEO, chairman comments, graphic, shares)
By James Davey
LONDON, March 13 (Reuters) - Britain's Wm MorrisonSupermarkets sparked fears of an industry price war onThursday after it posted its lowest profit for five years andsaid it would invest 1 billion pounds ($1.7 billion) in pricecuts over three years to win back customers.
Britain's No.4 grocer, which has been losing market share todiscounters Aldi and Lidl and laggedrivals in entering fast-growing online and convenience storemarkets, warned its profits would more than halve this year asit tries to restore its low-price image with shoppers, sendingits shares plunging 12 percent to a near eight-year low.
Shares in bigger rivals Tesco and J Sainsbury fell 5 percent and 8.5 percent respectively.
Jefferies analysts said the scale of Morrisons' priceinvestment was equivalent to "getting the bazooka out," whilePhil Dorrell, director of consultants Retail Remedy, said it hadraised industry fears of a profit-sapping battle over price.
"It doesn't look great," said one top 50 shareholder inMorrisons on condition of anonymity. "The certainty with thestrategy is that profits will be lower; what is less certain isthat the lower prices will stem sales declines."
Britain's "big four" grocers - Tesco, Wal-Mart's Asda, Sainsbury's and Morrisons - are all being outpaced bysales growth at discounters in a fragile economic recovery,while upmarket chain Waitrose is also trading ahead of the pack.
Morrisons has fared the worst, however.
"We cannot have our head in the sand and not confront thebrutal reality," Chief Executive Dalton Philips, told reporters,adding that the extent of change the discounters had prompted inthe market had not been seen since the late 1950s.
"There is this big debate going on ... in terms of is thiscyclical or is this structural? And we're saying this isstructural. We're going to be bold and act decisively," Philipssaid, adding other grocers mistakenly regarded the rise of thediscounters as cyclical.
Morrisons would help fund price cuts by reducing its costbase by one billion pounds through operating improvements andlower capital spending and by raising the same amount fromselling off properties over three years.
Morrisons will also exit non-core activities - baby goodsfirm Kiddicare and its stake in U.S. online grocer Fresh Direct.
CHAIRMAN'S BACKING
Morrisons shares closed at 205.2 pence, having hit aneight-year low of 201.4 pence.
The threat of a supermarket price war also hit foodproducers like Premier Foods, Dairy Crest andAssociated British Foods as their profit margins couldultimately be squeezed by the retailers.
The latest data this week showed sales at discounters Aldiand Lidl surged 33.5 percent and 16.6 percent respectively,though together they only account for around 7.5 percent ofBritain's total grocery market.
"All of a sudden everybody has realised that it's moreserious than first thought," said John Ibbotson, director ofconsultants Retail Vision, referring to the competitivechallenges to the "big four" supermarket groups.
"It's now a long-term structural thing. The middle isshrinking and it will keep on shrinking ... It's hittingMorrisons worst because their position is worst."
Morrisons will invest 300 million pounds in 2014-15 tonarrow the price gap with discounters, following similar movesby Tesco, Asda and theCo-op. . It willalso launch a loyalty card.
Philips, who succeeded Marc Bolland, now boss at Marks &Spencer, was endorsed by his chairman Ian Gibson. "Yeswe back the plan and yes we back the executive," he said.
Morrisons profit before tax and one-off items dropped 13percent to 785 million pounds in the year to Feb. 2, a secondstraight year of decline. Turnover fell 2 percent to 17.7billion pounds, with like-for-like sales down 2.8 percent.
The group warned underlying profit in 2014-15 would slump toa range of 325-375 million pounds, which at the midpoint is lessthan half the level analysts were on average forecasting.
After exceptional non-recurring costs of 903 million poundsincluding a writedown on underperforming businesses, sites it nolonger intends to build stores on and mature stores, Morrisonsmade a pretax loss of 176 million pounds in 2013-14.
Despite the profit fall and warning, the group raised its2013-14 dividend by 10 percent to 13 pence a share and committedto a 5 percent minimum rise in 2014-15. It said it would returnsurplus cash to shareholders as appropriate.
($1 = 0.6022 British Pounds) (Additional reporting by Paul Sandle, Neil Maidment, KateHolton and Chris Vellacott; Editing by Mark Potter and ElaineHardcastle)
Tesco (TSCO)
Marks & Spencer (MKS)
Sainsbury's (SBRY)
