Morrisons Q1 LFLs fell but retailer saw growth in fresh food

Morrisons Q1 LFLs fell but retailer saw growth in fresh food

While UK retailer Morrisons witnessed the erosion of like-for-like sales continue as it moved into the first quarter of this year, the group emphasised it is starting to see positive revenue trends, led by improvements in its key fresh categories.

In a trading update released today (9 May), Morrisons said, in the three months to 5 May, like-for-like sales excluding fuel fell 1.8%. This compared to a drop of 2.1% in the 2012/13 fiscal year.

Speaking to journalists during a conference call this afternoon, Morrisons CEO Dalton Philips revealed the improved sales movement was led by a recovery in fresh food.

Fresh fish sales rose 10%, fruit and vegetable sales increased 4% and fresh beef sales rose 2% - or 3% ahead of the market, which was depressed due to the horsemeat scandal that hit Europe in the first half of the period. "Overall we are seeing momentum in the right direction in those key fresh categories," Philips commented.

Philips conceded sales in other categories continued to contract. "We don't strip it out, but overall we were down 1.8%."

Nevertheless, he told just-food: "We over-index in fresh. It is a very large category for us. If you take something like beef, we have the second-highest market share in the UK, even though we are the fourth-largest grocery retailer. So, to get those sorts of increases in fresh, we feel really good about that."

Philips was less candid about what plans Morrisons has to drive improved sales outside the fresh aisles but did suggest the retailer is looking to regain momentum across the store.

Morrisons has attributed its declining sales and falling market share to a number of issues relating to communication and execution last year. Significantly, Morrisons has stepped up marketing around what it sees as its key point of difference: the quality it offers in fresh thanks to its vertically integrated supply chain.

Towards the end of last year, the supermarket group launched an advertising campaign, "more of what matters", in conjunction with Britain's Got Talent hosts Ant and Dec. Philips suggested it was a key initiative as the group looks to effectively communicate its message to consumers.

The group's focus on communicating the virtues of its vertically integrated supply chain also meant it emerged from the horsemeat scandal relatively unscathed.

"It was clearly very difficult for the industry and to an extent the whole industry suffers from something like that because it is a great concern to the consumer," Philips suggested.

However, he continued: "We reacted really well to it. We didn't have any issue at all and that's not surprising because we control so much of our supply chain and, again, it just reinforced one of our convictions that it is too complex a supply chain - you've got to keep it simple."

Fresh food sales are also being boosted by the "tailoring" of Morrisons Fresh format concept to new and existing stores, Philips suggested. "This continues to be very well received by customers."

The second prong of Morrisons drive to improve near-term sales comes on price: the group has lowered prices on everyday essentials, "where it matters most to consumers", while also stepping up its promotional activity, bringing in "sharper promotions".

While Morrisons was upbeat on the performance of some of its categories, analysts have emphasised the supermarket continued to under-perform the rest of the UK grocery sector in the period.

Conlumino analyst Joseph Robinson said: "With the UK food and grocery market increasingly being characterised by falling customer loyalty and low volume growth, which is in turn being met with heavy promotional activity among the main players, Morrisons has been forced to react. To this end, there has been a noticeable sharpening of promotional activity with the grocer building upon investment into innovative campaigns such as Payday Bonus, with the launch of its new Our Pick of the Street campaign - which focuses in particular on fresh products."

However, he added: "It will continue to face short term challenges as it plays catch up with rivals. While the grocer is displaying greater adeptness in communicating its key points of differentiation, there is still much work to be done around strengthening price perceptions."

Meanwhile, Shore Capital analyst Clive Black stressed the group's like-for-like sales decline came in an inflationary environment, meaning volumes would have contracted further still.

"Whilst an improvement on the especially weak trading data for Q4 2012/13, it needs to be remembered that this LFL figure is after inflation (c2-3%), which remains in the system, the contribution from maturing new space and the ongoing extensive refurbishment programme that the group is engaged in; its 'Fresh Formats' (40% participation is targeted by the year end). Put into this context, then Morrison's trading remains weak."

Nevertheless, the market has largely remained upbeat on Morrisons longer-term prospects as the group expands its multi-channel approach. The company is ramping up convenience store openings, having acquired a swathe of high street locations in recent months, and it is preparing to launch an online offer this financial year.

Optimism surrounding Morrisons mid- to long-term upside perhaps helped to mute a reaction in the share price, which was down just 2.44% at 15:15 BST.