Philips: "Yes we are late but were not too late"

Philips: "Yes we are late but we're not too late"

Morrisons, the UK's fourth-largest supermarket, has seen sales come under sustained pressure. The retailer has responded by filling in the gaps in its portfolio, augmenting its bricks-and-mortar supermarket base with a convenience and online offering. Will it be enough to bring sales momentum - or do other underlying issues persist?

Morrisons sales have suffered under a period of prolonged pressure. In its most recent update, the grocer revealed like-for-like sales fell 2.4% in the three months ended 3 November. This downward trend has been evident for some time. In the first quarter of this year, like-for-like sales dipped 1.8% and in the second quarter they were down 1.4%. For fiscal 2012, like-for-like sales dropped 2.1%.

Morrisons management has detailed a clear strategy designed to bring vigour back into the business and right previous strategic errors. The group is investing in increasing its exposure to the growth areas of the UK grocery market: online and convenience.

In a fairly short space of time, Morrisons has pulled together a significant online capability. This has been achieved through a 25-year deal with Ocado that sees the group take control of its fulfilment centre in the Midlands. Morrisons has also obtained the licence for the online retailer's technology. 

CEO Dalton Philips said the tie-up with Ocado helped to "minimise the execution risks" as the group rapidly builds up the reach of its online business. By the end of next year Morrisons plans to have an online delivery service that can reach 50% of UK households.

Philips said that, through the Ocado deal, Morrisons has "married the best technology that is out there with our leadership in fresh foods".

The company said it aims to bring "market street to your street" and has developed an online offering that mirrors some key aspects of the in-store experience, notably the counter-service that has become the group's trademark.

The new Morrisons' website will offer a virtual butcher and fishmonger. Consumers will be able to get information and advice on the cut of meat they are picking, including serving suggestions such as appropriate sides or wines.

Morrisons also intends to build consumer confidence in the quality of its fresh produce, with initiatives including a door step check for fresh produce quality and "expert reviews" rating produce quality based on factors such as seasonality.

Potentially, if Morrisons can convince consumers to buy more fresh products online, this could have some operational benefits. Because of Morrisons' integrated supply chain, the retailer experiences better margins in fresh foods. Therefore, if the average shopping basket is made up of a greater proportion of fresh products, the group will benefit from an improved product mix. More fresh food sales could also lead to higher frequency orders.

On the one hand, Morrisons aims to entice consumers with the quality of its fresh offering. On the other, it aims to boost its appeal through a value-focus. Delivering on price will be key to Morrisons success given the retailer is positioned as a value retailer, and its core customer is a price-conscious consumer.

The company will be offering the same pricing and promotions as it delivers in-store, with the addition of some web-specific promotional activity around bulk items. It will also deliver to your door from a starting price of just GBP1, rising to GBP5 at peak times. This seems to be broadly below the industry average.

However, unlike UK rivals, Morrisons will not be offering a price comparison or price guarantee initiative.

Morrisons intends to address another bug-bear of the online shopper: substitutions. The need for substitutions will be lowered because Morrisons will use a dedicated fulfilment centre, unlike the in-store picking model that has been widely adopted throughout the UK, management suggested.

Even if Morrisons proposition is enough to appeal to shoppers, is it really enough to get consumers already shopping online at rivals to go to the trouble of switching? Morrisons has an answer to this problem also.

"Getting people to transfer from one online shopping [system] to another can be a bit of a chore like changing your bank account," Morrisons MD of online food Simon Thompson conceded. "We are bringing simple switching to the market."

Unique to the platform used by Morrisons and Ocado is a function that allows consumers to import favourites on their shopping list stored on the databases of rival online grocers. Consumers can also create an account via Facebook, where personal data will be transferred over.

Briefing media on the retailer's plans in London yesterday (21 November), Philips appeared confident in the retailer's proposition - and its ability to catch up with the UK's other large supermarkets, which have been offering online sales for a decade or more.

"There is a huge difference between late and too late. Yes we are late, but we are not too late. We have used that time wisely to learn from others. A decade of experience from Ocado, [its investment in US grocer] Fresh Direct and others. We have challenged ourselves to leverage this knowledge to create something that is different. A proposition that is worth the wait," he insisted.

Speaking to just-food on the sidelines of the launch event, Morrisons chief financial officer Trevor Strain said the move online was both "offensive" and "defensive".

Morrisons clearly intends to poach online consumers from its rivals. It also hopes to woo back multi-channel consumers who might shop with Morrisons in store, but then order online elsewhere.

According to data collected by the company, 32% of existing Morrisons customers already shop online elsewhere. In addition, Morrisons said that on average multi-channel consumers spend twice as much as those who shop exclusively in-store.

Morrisons has said it believes its online business will be operating profit accretive in three years. This is an ambitious goal, given that other retailers' online businesses are still reportedly operating at around break-even.

Morrisons has been hesitant to break out the numbers detailing how this can be achieved. Strain told just-food this was because a high number of variables that mean the critical mass at which the model will become profitable is a fluid beast.

"The main reason [we can't detail it is] there are too many variables - like basket size and mix," he suggested.

Nevertheless, Strain remained confident filling out the Morrisons proposition - both in convenience and online - will drive incremental sales growth and help build "real momentum in the underlying business".

Morrisons has been busy developing an online proposition that it hopes will set it apart. At the same time, the group has also been driving the pace of expansion in convenience, snapping up town centre properties on UK high streets. During its most recent quarter, the company opened 36 'M local' convenience stores in three months. This brings the total number of convenience outlets it operates to 69 and the company plans to open a further 100 M local's in the 2014/15 financial year.

Philips concurred. He told just-food the development of a multichannel offering would "absolutely" help sort out some of the like-for-like issues that the group is facing in-store.

"We have a headwind of 150 basis points, 200 basis points, that we face. We are very explicit about that: customers are going into these new channels. When we compare our like-for-likes to our competitors like-for-likes internally, [we] will make the adjustments for what those like-for-likes are if you strip out convenience and online from our competitors. But in 2015, we will have a strong online business, a strong convenience store business - we will be on a very level playing field. That will be very exciting for us."

Morrisons aims to become a more modern retailer that is responsive to changing consumer shopping habits in the UK. It thinks it can do this while retaining its appeal to the value-conscious core Morrisons shopper. It also believes that success will be driven by the things that make Morrisons distinct: its focus on freshness, artisanal skills and a vertically integrated supply chain. If it is right, the laggard of the UK supermarket scene could be preparing for a resurgence.