Morrisons facing strategic dilemma

Morrisons facing strategic dilemma

The announcement from Morrisons that CFO Richard Pennycook plans to leave the company will come as a blow for the UK retailer. Morrisons is trading behind the market and Pennycook's exit serves to focus attention on the strategic problems that management is currently grappling with. Katy Askew reports.

Morrisons announced this morning (25 June) that Richard Pennycook plans to stand down from his post as CFO at the UK's fourth-largest supermarket at end of June next year.

Pennycook is a central figure in the Morrisons management team. He has served as finance chief at the grocer since 2005 and was even tipped as one of the potential successors to former chief executive Marc Bolland, before the eventual appointment of Dalton Philips in 2010.

Currently, Pennycook's responsibilities include finance, strategy, online and IT. He has supervised the overhaul of the group's IT infrastructure - which was found to be severely lacking when Morrisons store base was vastly expanded after its 2004 takeover of Safeway - helped determine Morrisons' strategy as it transitioned from a regional to a national retailer and is developing Morrisons fledgling online strategy.

As chairman Ian Gibson said today: "Richard has done an outstanding job for Morrisons over the last seven years. He was the architect of the company's optimisation plans and has played an increasing strategic role in the last few years as Morrisons has completed its transformation into a nationwide retailer."

The loss of Pennycook, who is widely billed as a "safe pair of hands", is therefore likely to come as a knock for the retailer, which has seen its strategic direction criticised as sales have fallen behind the rest of the market. His departure will serve to focus the spotlight on the strategic dilemma that the company is facing.

"Today's departure does appear to raise questions over group strategy," Keith Bowman, equity analyst at Hargreaves Lansdown, tells just-food. "The worry is that the takeover of Safeway may have propelled it into the big league, but the digestion and subsequent management indecision may now have left it chasing the field."

Morrisons posted a its first like-for-like sales drop since 2005 last month when it booked a 1% fall in first quarter underlying sales as consumers switched to rivals that were promoting more heavily. Morrisons said the drop was also due to the tough comparables that it faced, as the first quarter of the previous year had been boosted by the Royal Wedding and Easter.

The group has also seen its market share eroded as the group has lost ground to competitors, particularly Asda and Sainsbury's. According to the latest market share data from Kantar Worldpanel, Morrisons' share of UK grocery sales dropped by 0.4 points in the 12 weeks to 15 June.

Kantar director Edward Garner suggests Morrisons lost out to rivals Asda and Sainsbury's - both of which were able to grow market share - due to their stronger price message.

"What both outlets have in common is strong price messages - Asda with its Price Guarantee and Sainsbury's with its Brand Match - and this is supporting them well," Garner says.

Morrisons' CEO Philips had previously indicated the company would "sit back" from heavy discounting, including the use of couponing, to instead focus on offering "value in store". However, consumers have voted with their feet, forcing Morrisons to re-evaluate its promotional strategy and the group is trialling the use of vouchers as a promotional tool in ten stores in the north-east of England.

Under Philips, Morrisons has relaunched its own-label lines, worked to improve its image as a quality retailer of fresh products and focused on developing its convenience offering. The company is also studying the best way to develop a profitable online proposition and to this end acquired a stake in US online grocer FreshDirect.

However, poor sales have prompted commentators to question whether this is the right direction for Morrisons to take.

Earlier this month, the chain's founder and former CEO Sir Ken Morrison suggested that management was losing touch with its core consumer. Speaking during the group's AGM Morrison, who grew the business from a market stall, suggested the current management is "preoccupied with many other activities" and warned "neglecting the core business is dangerous."

Prior to its recent troubles, the group had booked strong sales growth that outpaced the market through focusing on its core food offering and upgrading its existing stores. While this strategy had delivered solid sales gains, at the time the company had faced criticism that it would only reap rewards in the short term and that it needed to diversify its operations to ensure long-term expansion.

So, while some are warning that Morrisons could be at risk of taking its eyes off the ball and overcommitting itself, others would argue that the legacy of previous management decisions has left the group playing catch-up in the rapidly growing arenas of convenience and online.

"The lack of a material convenience store portfolio and a true online offering are also arguably crimping longer-term growth prospects," Bowman suggests.

Morrisons has also relaunched its own label offering and taken steps to add premium elements to its stores. However, it seems that by focusing on improving its quality - particularly in the fresh aisle - the supermarket operator has run the risk of alienating its base.

"Morrisons may be disenfranchising traditional clients whilst not yet attracting those more in tune with its higher category offer," Shore Capital analysts Clive Black and Darren Shirley warn in a note to investors.

The Shore Capital say Morrisons "will not sell any fewer baked beans because its finance director is going" but add his departure will be "a distraction for the board".

Pennycook's departure comes at a time when Morrisons is struggling to define its strategic direction and convince shoppers of its offer. The loss of such a seasoned hand will certainly come as an unwelcome development for the retailer.