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September 6, 2012

On the money: Morrisons defends “fresh format” stores, voucher strategy

Morrisons CEO Dalton Philips today (6 September) defended the UK retailer's "fresh format" stores and its policy on vouchers, two strategies brought into question in recent weeks.

By Dean Best

Morrisons CEO Dalton Philips today (6 September) defended the UK retailer’s “fresh format” stores and its policy on vouchers, two strategies brought into question in recent weeks.

Some City analysts have argued the fresh format stores, outlets with more space for fresh and chilled food, have disenfranchised Morrisons’ core customers.

Morrisons’ reluctance to offer consumers promotional vouchers on groceries has also been noted, especially with Tesco stepping up its activity and Sainsbury’s use of its Brand Match scheme.

However, speaking to reporters after Morrisons reported a mixed set of half-year results that included a dip in like-for-like sales, Philips stood by the retailer’s strategies.

He said the fresh format stores were a “great concept” where sales and customer numbers were growing and denied Morrisons’ core customers were looking elsewhere.

“There is absolutely evidence that those stores in general are increasing like-for-likes by between four and six per cent versus last year and the same for their customer count. In this market, to be talking 4-6% sales increase is big,” he said.

“They are not disenfranchising customers in any shape or form otherwise sales wouldn’t be so strongly up. They are a format doing something strategically very difficult for our competitors to copy. It’s about real butchers, bakers, cheese mongers. It’s a great concept. That’s why we’re going from 30 in half one to 60 in half two. That’s how confident we feel about it.”

Morrisons has lagged its rivals in offering consumers promotional vouchers and Philips has questioned their use in the past. However, the retailer launched a nationwide scheme last month.

Philips told just-food most coupon programmes were a “gimmick” and said Morrisons had decided to focus on “intelligent vouchering”.

“Vouchering in most cases is a gimmick. We don’t believe in gimmicks. We’re about every day low prices. That is how [Morrisons founder] Ken [Morrison] built the business and that’s how we’re taking it forward,” he said. “There are times when intelligent couponing can make sense. Blind money-off is something in general we have participated in at times but it is coming to an end and we try and avoid as best we can.”

The Morrisons chief said the retailer’s scheme was an “at-till, intelligent vouchering system where we can target specific customers with specific vouchers that are relevant to them”. He added: “People buying mince and peppers we can offer them an Old El Paso mix. That sort of intelligent vouchering.”

The retailer outlined plans for expanding its convenience store business. It has five M-Local outlets open and wants to have 20 by the end of this year and 50 by the end of next year. It will open a distribution centre in London to help launch a number of convenience stores in the city. Philips said the facility would be ready by next February. “There’s huge opportunity in London. Our offer is a fresh offer at the same price as our regular stores,” he said.

However, Morrisons has still to make a decision on whether to offer an online shopping service for food. It announced a move to sell wine online but Philips again insisted Morrisons would launch a food offer when they can “do it right”.

He told just-food: “Nobody’s making money in the UK delivering food online today. If you can’t deliver online and make money, you end up subsidising those customers by charging your core customers more and philosophically we can’t get our heads round that.”

Philips said a team of Morrisons executives had returned from the US, where the retailer owns a stake in online grocer FreshDirect. “FreshDirect is very profitable actually,” he said. “They focus on super quality, great pricing and out service. Those are the three big learnings we are taking back to the UK. We’ve got all the capabilities internally but we’re not committing to it yet as it’s got to be right for our customers and our shareholders. It’s a growing market and we’re encouraged by what we see.”

Shares in Morrisons were up after the retailer’s results announcement. At 10:02 BST, Morrisons shares were at 291.4p, 3.81% higher on the day.

Morrisons had claimed “steady progress” in the first half of its financial year after reporting results that included higher revenues, net profit but falling like-for-like sales.

The retailer also announced plans to reduce its capital expenditure by GBP100m (US$126.2m) in the next two years.

CFO Richard Pennycook said the decision on capex was not simply a cost-cutting measure.

“It’s not cost cutting,” he insisted. “We still have a very big investment programme. It’s about balancing our overall investments. We are increasing the number of fresh format stores, which are existing Morrisons stores and investing further in that new format and we’re getting underway with convenience and online. In order to trim the sales and keep the overall capex programme balanced, we’ve phased our new store space a little differently. Instead of opening 2.5m sq ft by January 2014, it’s by July 2014. We’re not stopping anything. We’re phasing it slightly.”

He added: “We are focused on capital discipline, capital returns and if we’re going to increase the level of investment in one part of the business, we trim elsewhere.”

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