Can Morrisons reclaim its identity?
Chief executive Dalton Philips is seeing more British families choosing to shop with discounters Aldi and Lidl
By Graham Ruddick 10 March 2014 • 19:01 pm
Morrisons owns 90pc of its stores – far more than Tesco and Sainsbury's
"Rarely have we been so concerned going into a set of final results as we are with this edition," Clive Black, analyst at Shore Capital, said on Monday.
The analyst was referring to Wm Morrison Supermarkets' annual results which will be published on Thursday. It is hardly the most ringing endorsement for a FTSE 100 company and its senior management.
Dalton Philips, the boss of Morrisons, faces the biggest test of his four-year tenure at the helm of the supermarket group this week. There also questions about whether Sir Ian Gibson, who has been chairman since March 2008, is providing enough leadership.
Morrisons is expected to report a sharp 17pc drop in pre-tax profits to £731m for the financial year to end of January, its lowest profits for five years.
Profits have slumped on the back of an eye-watering decline in sales across Morrisons supermarkets. Like-for-like sales fell by 5.6pc during the vital Christmas period and the City fears its performance has worsened since then.
Philips needs to convince the company's shareholders that he is the man to lead the Bradford-based supermarket's recovery.
So far, most of the agitation from investors has involved pushing Morrisons into selling off parts of its vast £10bn property portfolio.
In response, the company is expected to announce it will dispose of £500m of peripheral investment assets, including warehouses and shopping centres.
But for the long-term health of Morrisons, this debate is irrelevant.
The key challenge for Philips is to find an identity for Morrisons in the new era of food retailing.
How does Morrisons respond to the shrinking middle ground? More and more British families are choosing to shop with the discounters Aldi and Lidl or the upmarket Waitrose.
Black's concern is that Philips has taken Morrisons in the wrong direction by focusing its stores on fresh food."Quite why Morrison is underperforming is clear to our minds and it has little to do with under-representation in convenience or online," he said..
"We believe Morrisons has ostracised core customers whilst failing to attract new footfall in an increasingly competitive market; in our view, the key driver of this process has been 'Fresh Formats', which was particularly ill-timed given the growing popularity of limited range discounters and high street value stores."
Black says Morrisons needs to focus on selling the cheapest fresh produce by taking advantage of its manufacturing capabilities.
Morrisons has always prided itself on the quality of its fresh food, developed by its own farmers, fishmongers and butchers.
But at Christmas this unique selling point did not connect with British shoppers. Aldi and Lidl shoppers who would normally come back to Morrisons for special festive items instead stayed with the German discounters for their lobster and mince pies.
Philips has blamed Morrisons' underperformance on its lack of exposure to the fast-growing online and convenience store sectors. Morrisons only launched an online grocery service in January and has just over 100 convenience stores, compared to more than 1,500 for Tesco.
However, the shift in trends at Christmas demonstrated that there are broader changes in the behaviour of British shoppers. The "big four" supermarkets – Tesco, Asda, Sainsbury's and Morrisons – are gradually realising they need to close the price gap with the discounters.
Since then, Tesco has declared a mini price-war by cutting the price of cucumbers, carrots and milk. On Monday, it reduced the price of a litre of petrol and diesel by 1p. Asda pledged at the end of last year to commit £1bn to lowering the price of core grocery items.
Philips is likely to follow this week with £300m of price cuts. This will be seen as a step back towards Morrisons' roots under Sir Ken Morrison when it was known as a gritty value retailer. Philips is also trialling a new store format in Preston that, intriguingly, looks like Morrisons' own take on discount retailing. It is a retail warehouse with fewer ranges, quicker checkouts and an efficient stocking system.
However, will this investment in price be enough to appease Morrisons' biggest investors, who include Invesco, Brandes and, of course, the Morrison family?
First, cutting prices will damage margins and therefore, in the short term at least, profitability.
Mike Dennis, analyst at Cantor Fitzgerald, said Morrisons also needs to reconsider its roll-out of M Local convenience stores. "Apart from investing in price we believe Morrisons should slow down the opening of M Local stores and concentrate on finding better high sales density sites with better returns," he said.
"We also believe many of the 85 stores opened to date have sales per week below £50k and have been bought at premiums to the market."
According to Dennis, Morrisons should consider making a bulk purchase of new convenience stores by bidding for the Co-operative Group's pharmacy chain.
Philips is a well-travelled retailer who is well aware of the impact that discounters and new entrants can have on established players. The Irishman has worked in Canada, New Zealand, Spain and Germany, the home of Aldi and Lidl.
Now he will need to draw on that experience. Analysts believe he has at least one thing in his favour – Morrisons' performance over the last year has been so disappointing that it simply has to improve in 2014.
"Morrisons faces very soft sales comparatives from last year," Dennis said. "So we expect this to be the low point in sales for Morrisons in 2014."
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