Philips online drive didnt represent a quick solution

Philips' online drive didn't represent a quick solution

Morrisons has announced chief executive Dalton Philips is to leave the UK grocer, an apparent victim of the retailer's inability to compete against the likes of Aldi and Lidl. Philips tried to emphasise Morrisons' value credentials but early efforts do not seem to have paid off and the company has indicated a fresh push on value and costs under a new chief executive. Katy Askew reports.

Under pressure for a number of months, Morrisons chief executive Dalton Philips is to leave the UK's fourth-largest grocer, the company announced today (13 January).

The embattled Irishman has faced a barrage of criticism in recent quarters and it seems Morrisons' poor trading performance over Christmas has been the straw that broke the camel's back.

After five years at the helm, Philips is out and the board, under chairman-elect and former Tesco CFO Andrew Higginson, has started the search for his replacement.

Higginson said Philips "deserves particular credit for facing into and dealing with the pricing issues that have now become evident", for building Morrisons' presence in the convenience and online channels and for "modernising" the retailer's operating systems.

However, Higginson, set to become Morrisons' chairman next week, added: "In the next chapter of Morrisons' development, we need to return the business to growth. The board believes this is best done under new leadership."

Philips' strategy initially centred on developing an online offering and accelerating expansion of the supermarket operator's convenience business. The agenda was not out of step with the trends in the UK grocery sector. As Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said today: "The company's performance is not as dire as some had feared over the period.... Although late to the party compared to its rivals, its online presence has shown strong growth, whilst the convenience store business is also burgeoning."

However, while Morrisons' convenience and online businesses have witnessed solid growth, being late to the party meant that growth came from a low base. Development in these areas, itself a costly endeavour, did not represent a quick fix for a retailer which was seeing its core supermarket business come under particular pressure from the likes of Aldi and Lidl. Last March, Philips, in a bid to turn around declining sales, announced a fresh offensive on price. But did the investment in convenience and online see Morrisons veer too far from the core strategies that had helped the business to grow in previous years? 

Founder and former chairman Sir Ken Morrison seemed to think so. Over a number of years, he repeatedly insisted the chain was losing touch with its market stall roots and argued Morrisons was alienating its core shoppers. He recently went so far as to describe Morrisons' turnaround plans as "bulls**t".

Given the current situation faced by UK grocers, it seems Sir Ken may have had a point. But hindsight is a wonderful thing. Five years ago, when Philips took the helm, the prevailing view was that Aldi and Lidl would likely be a flash in the pan. Sure, they were growing quickly. But they only accounted for a small share of the market, the top line was driven by space expansion and, importantly, they were viewed as marginal by UK consumers.

The rapid emergence of the limited assortment discounters has turned the UK grocery scene on its head, with profound consequences for manufacturers and retailers.

Philips should be credited as trying to respond to the threat from the discounters. In its most recent endeavour to offer value, Philips oversaw the development of Morrisons' "match and more" promotion. This price-match scheme offers Morrisons shoppers the opportunity to recoup the price difference on products that would have been cheaper at Aldi or Lidl through vouchers redeemable in store.

The company was also the first of the mainstream supermarkets to confirm plans to cut its range and adjust its pricing strategy away from promotions. As Sanford Bernstein's Bruno Monteyne noted today, Morrisons' Christmas trading update carried "some positives" on range and promotional activity. "Management continued its simplification of range, reducing its SKU count by 100 from Q3 to 22,050, while it also decreased its items on promotions by 9.6% year-on-year."

Higher volumes of fewer SKUs should deliver operational savings and reduce sourcing costs, Morrisons believes. The logic behind this approach is clear and, again, Morrisons was ahead of some of its rivals. Tesco said last week that it too would reduce the number of products it carries and slash prices.

However, as the continued falling sales at Morrisons demonstrate, price cuts are not always enough to drive up volumes. The consumer response to its efforts on price has been disappointing to say the least. Morrisons is now facing a retailer's worst nightmare: it is selling a lower volume of goods at a lower price than this time a year ago. And the trend looks set to continue.

So, what next for the group? Speaking during a conference call with analysts today, Higginson provided some more colour on the board's priorities. According to the chairman, the board believes Morrisons must zone in on the basics of value, cash and cost.

A tighter cost focus could potentially present a further challenge to suppliers. Higginson is no doubt referring to cutting complexity within Morrisons' supply chain, again raising the possibility that some suppliers could be delisted. Suppliers may also come under pressure to extend payment terms in order to ease pressure on cash flow.

Grocery suppliers in the UK are facing something of a perfect storm. There is pressure on pricing and payment terms on the one hand and the threat of delisting as ranges are rationalised on the other. This will likely mean tougher negotiations between suppliers and retailers across the board.

The issue for the new CEO at Morrisons - and indeed all UK supermarket operators - will remain how to build sales volumes. Higginson revealed Morrisons has not yet formulated a short-list of candidates for the post. He said the retailer would "cast the net broadly" but added "it is not a job for people with L-plates".

A truer word could not be spoken. Philips fell foul of the seismic changes taking place in UK grocery. With an increased focus on lowering prices from Morrisons and its major competitors, testing times are ahead for UK retailers and suppliers alike as the UK grocery price war continues to escalate.