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March 14, 2014

On the money: We can fight on price, insists Morrisons

Morrisons has set out its bid to win back consumers and reignite sales - and the UK's fourth-largest grocer has insisted it could hold its own in an increasingly price-focused market.

By Dean Best

Morrisons has set out its bid to win back consumers and reignite sales – and the UK’s fourth-largest grocer has insisted it could hold its own in an increasingly price-focused market.

After a second successive year of falling sales, CEO Dalton Philips yesterday outlined Morrisons plans to invest in its pricing, make its promotions more “stronger and smarter”, cut its range and introduce a loyalty programme to try to stem the retailer’s declining market share.

Morrisons, like the rest of the UK’s four largest grocers, has seen its sales affected as more consumers turn to discounters like Aldi and Lidi, which are gaining share of the country’s food retail sales.

Philips said Morrisons would lower its prices “significantly” in response to what he said were the biggest changes in the market since the 1950s and the advent of the supermarket.

“The rules of the games have changed. There is now a new price norm, a new expectation on price, an expectation set by the discounters,” Philips told reporters in London yesterday (14 March).

“The customer has started to shop discounters in the same way as they would a traditional supermarket. It’s a huge challenge for us and it is an issue affecting all the big supermarkets, we are all losing sales to the discounters.”

Morrisons plans to spend GBP300m on what Philips called its “proposition” in the new financial year, although he declined to specify how much would be invested in prices. Philips said Morrisons had seen “strong volume uplifts” for the products on which it had already cut prices, reporting the retailer’s sales of peppers had increased by five times. “We will reinforce our proposition as a value-led food grocer,” he insisted. “We will lower more prices on a permanent basis.”

However, Morrisons is not the only UK grocer to have sharpened its pricing pencil in response to the growing popularity of the discounters.

Three weeks ago, Tesco said it would spend an extra GBP200m on lowering prices of “essential” items in a bid to improve its performance in the UK, where its market share is also falling.

At the start of the year, Asda announced plans to sell a range of products at 50p, a clear shot across the bows of the discounters. That move followed its announcement in November that it would spend GBP1bn on cutting prices to “widen the gap” with its big three rivals, Morrisons, Tesco and Sainsbury’s.

However, Morrisons’ management insisted the retailer had the financial firepower to compete. “We’ve such a strong balance sheet and that gives us huge muscle,” finance director Trevor Strain said.

Morrisons has identified GBP1bn in what it calls “self-help” measures to fund the investment in price, refocused promotions, improving its own label and other measures, including the launch of a loyalty card.

The GBP1bn programme will see Morrisons, for instance, use its vertically-integrated manufacturing operations; it makes 60% of the fresh food it sells. The retailer also plans to improve the way it orders and processes stock. It also plans to reduce sourcing costs. The retailer pointed to a 17% saving after it re-sourced its tuna supplies.

The fall in sales was just one part of a poor set of annual results from Morrisons. The retailer posted a pre-tax loss of GBP176m for the 12 months to 2 February.

Morrisons fell into the red as part of its efforts to refocus the business. It booked “non-recurring exceptional costs” of GBP903m, including a GBP163m charge linked to child products retailer Kiddicare, which the retailer plans to sell. Morrisons also filed charges of GBP319m relating to “elements of our store pipeline” and GBP379m “in respect of trading stores”.

Morrisons said it planned to “exit from non-core activities”, including Kiddicare and its stake in US online grocer FreshDirect. Its root-and-branch appraisal of the business also includes moves to cut capex and reduce inventory.

The retailer forecast underlying profits for the new financial year 2014/15 would be GBP325-375m – less than half the GBP785 it filed for the past fiscal year, which itself was down 13% on the previous 12 months.

Shares in Morrisons tumbled yesterday but the retailer insisted the strategic and financial moves were designed to build a stronger business. Management, for example, pointed to its guidance for free cash flow to hit GBP2bn.

After Morrisons fell more than 6% yesterday, the stock rose slightly today, closing up 1.36% at 208p. So far in 2014, Morrisons shares have fallen by over 20%.

Analyst opinion remained divided over the outlook for Morrisons. “We think management’s investment in the long-term positioning of the business and focus on cash generation is the right move strategically,” Bank of America Merrill Lynch Xavier Le Mené said.

Cantor Fitzgerald Mike Dennis issued a note of caution. “The strategy described as ‘bold and comprehensive response’ may not, in our view, secure the planned cost savings or working capital reductions as there are still many facets that could go wrong in terms of IT cost savings, launching a loyalty card while cutting prices and reducing range.”

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