Talking shop: Morrisons prepares for fresh food battle
Morrisons is again focusing on fresh food to differentiate itself from rivals
Morrisons may be mulling expansion into the world of online and convenience retailing but, with Tesco looking to fresh food to revitalise sales, the UK's fourth-largest supermarket group is also turning to its founding principles to drive growth, writes Katy Askew.
Morrisons delivered what it described as "another good year" yesterday (9 March), when it revealed its 2011 sales rose ahead of the market, climbing 7%, while same-store sales increased 1.8%, excluding fuel, during the period.
And, warning of the continuing economic challenges in 2012, the company unveiled a swathe of headline-grabbing investments that are designed to drive growth at the UK‘s fourth-largest supermarket operator.
The firm confirmed that it will dip its toe in the increasingly important waters of online retailing, launching a general merchandising website to compliment its in-store food offering in the fourth quarter.
Morrisons is evaluating an online food launch for 2013/14, but, speaking to reporters in London yesterday, CEO Dalton Philips again insisted Morrisons would not launch an online food offering unless management believed that it could generate profitable returns.
An e-commerce arm that failed to be self-sustaining went against the grain of Morrisons' retail culture, Philips suggested. "We shouldn't subsidise an online business by charging our core customers who drive to our shops more."
Philips revealed the group had a "team" studying the operations of EBIT-generating Fresh Direct, the US-based online food retailer in which Morrisons acquired a stake last year. While no assurances were given, Philips appeared optimistic Morrisons will be able to implement learnings from Fresh Direct in order to establish a UK-based food e-commerce operation.
The group also revealed it is opening more M Local convenience stores, with 20 new outlets planned this year and a further 50 openings projected for 2013.
In addition, Morrisons is investing in its programme of new store openings "to fill the white space" on the map. The company has targeted a 2.5m increase in square footage by 2014 and expects to open 700,000 square foot of new selling space - around 25 supermarkets - this year.
However, as Morrisons expands through its multi-format, multi-channel approach, Conlumino analyst Neil Saunders warned the group could risk losing sight of its core values.
"The challenge for Morrisons is to maintain its core values and appeal as it continues to expand. Moves into online, non-food and convenience are all sensible and potentially lucrative. However, with each move to further stretch its influence, it risks being seen as just another supermarket behemoth and losing a real advantage in differentiating itself from some of its rivals," Saunders suggested.
Nevertheless, Morrisons remained confident that it will be able to differentiate itself from the competition and woo UK consumers through a focus on its founding "market stall" principles of fresh food offered at competitive prices.
In a bid to deliver a superior in-store experience, Morrisons has come to the conclusion that shoppers are seeking a "deeper engagement" with food, a shopping experience that is "experiential over purely functional". The group has started rolling out a new store model that reflects an increased focus on the fresh aisle and highlights the retailer's artisan credentials.
This "fresh format" was introduced to 12 stores in 2011. According to Philips, these outlets are offering the "best food in the UK, unrivalled value and fantastic service in a store that really feels different".
At these stores, Morrisons increased the floor space allocated to chilled and fresh foods by "liberating" 10% of floor space that had been dedicated to ambient products through SKU rationalisation. The group also "took down walls" to allow consumers to see its butchers, bakers, fishmongers and counter staff preparing food.
Sales over the last quarter at these 12 stores at have been "really encouraging", Philips said. The group has witnessed a 13% increase in fish and butchery sales, while produce sales rose 14% at refurbished stores.
Morrisons said it expects to launch 36 additional stores in the next few months. It will "liberate" 114,000 square feet of ambient space in 48 stores by the first half of 2012, meaning that 15% of total sales will be generated by refurbished outlets. The supermarket is targeting "liberating" a total of 750,000 square feet across the estate, the company added.
The cost of refurbishment stands at GBP1.7m per store but is expected to decrease as the company converts smaller stores to the new format and as its experience of conversions increases means it can cut costs out of the process.
While Philips declined to reveal the sales boost Morrisons has seen in the stores moved to the new format, he insisted these outlets were generating stronger revenue growth than others in the group's portfolio.
"With this level of capex, 4-6% sales growth is needed to wash its face," he told just-food.
Increased sales were driven by a combination of higher footfall and bigger basket size, Philips added.
In order to deliver a high quality fresh offering at competitive price points, Morrisons has also invested in developing its vertical supply chain by expanding its manufacturing business, which has seen "significant growth" over the past 12 months.
The firm recently purchased a meat processing facility from Vion and last week announced it would become the first of the big four UK retailers to purchase fish "from the quayside" through the establishment of a processing facility in Grimsby.
"With the investments we've made [in manufacturing] and in opportunities we see, I remain confident that the business will deliver on a GBP50m EBITDA growth target," Philips said.
Likewise, in its bid to expand in the already crowded c-store sector, Morrisons is again looking to its focus on fresh to act as a point of difference.
M Local stores dedicate around 40% more selling space to fresh categories than Morrisons' competitors in the convenience sector, Philips said. In addition, fresh products are offered at the M Local outlets for the same price as in Morrisons supermarkets, marking a significant departure from the trend to offer fewer fresh products of a lower quality at a higher price, he added. This, Philips insisted, was proof that "convenience doesn't need to be compromise".
However, Morrisons is not the only UK retailer to target the fresh aisle as a means to drive growth and engage with consumers.
Earlier this week, UK retail colossus Tesco said it would make a "significant" investment in improving customer service, with a focus on fresh produce, meat, bakery and counter service.
While the company did not reveal the scale of investment, it did claim the move would create 22,000 jobs over the next two years.
This offensive from a much larger rival could cause Morrisons some cause for concern, Shorecap analysts suggested.
"Whether or not Tesco succeeds with its plans remains to be seen but we deem it reasonable to assert that its investment will tighten the environment for its competitors to some degree. In particular, we harbour concerns about whether Morrisons' self-improvement will be enough to prevent a squeeze on its earnings," Shorecap analysts wrote in a note to investors.
Philips remained undaunted. While you can "chuck money" at developing your fresh offering, he insisted it was impossible to recreate Morrisons' corporate culture - one that provides it with the skills and wherewithal to produce its own fresh food from 'farm to fork'.
As competition increases around fresh food in the UK, it is uncertain whether Morrisons' strategy and focus will be enough to win through and allow the supermarket to generate market-beating like-for-like growth. Nevertheless, with a well-developed and long-entrenched position, the retailer remains well positioned to capitalise on its advantage in this fresh battle ground.
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