Morrisons is paying for playing catch-up but do not write the UK’s fourth-largest grocer off just yet.
Market expectations had been lowered to such an extent that Morrisons’ share price jolted upwards following its results announcement yesterday, despite a 0.9% fall in like-for-like sales and a dip in pre-tax profits. The retailer also held its own for much of today (7 September), hovering above the FTSE100 as if to emphasise that rumours of its decline have been wildly exaggerated.
That’s not to say things aren’t tough. The food retail market as a whole is not a fantastic place to be presently, with retailers sandwiched between the rising cost of raw materials, including food commodities, and consumers that are either unwilling or unable to spend more. Tumbleweeds drift across the UK’s economic landscape.
This backdrop gives Morrisons’ plight some context. Philip Dorgan at Panmure Gordon said in a note this week that it maintains a ‘sell’ rating on the retailer, mainly because Morrisons’ numbers “contain the most risk” out of the main players. Morrisons, in his mind, is the gazel lagging the herd.
Some of this is down to circumstance. Having been founded in Bradford, Yorkshire, Morrisons’ geographic footprint is skewed towards economically poorer areas. “They’ve got a higher exposure to the north, compared to the other retailers in the big four,” Joseph Robinson, analyst at Conlumino, told just-food.
News that the firm’s CFO has one foot in a life beyond Morrisons headquarters is also a distraction not entirely of the group’s making.
Some of Morrisons’ problems, though, lie squarely at the door of previous management decisions. It has been slow to capitalise on the trend towards convenience, at a time when food sales in this channel are growing twice as fast as the overall food retail market.
Nor has Morrisons developed much of an online presence. Meanwhile, its belated introduction of an “intelligent” voucher scheme to entice hard-up shoppers looks like an admission that rivals were right all along.
As if these were not adequate challenges, the current management was this summer chastised by the firm’s previous CEO and founding family member, Sir Ken Morrison. Sir Ken warned that Morrisons was losing relevance with core customers by attempting to be all things to all men – and women.
The implication is that Morrisons’ stronger emphasis on fresh and chilled food is making it too posh; an interesting criticism given that the king of that format, Waitrose, is trying to crowbar its way into Morrisons’ north of England stronghold.
Analysts at Shore Capital were some of the most downbeat prior to Morrisons’ half-year figures this week, warning that the gap between the retailer and its competitors appeared to be widening.
However, yesterday’s results were not quite as bad as feared and did show that Morrisons’ management is at least engaging with the issues. “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,” the retailer’s CEO, Dalton Philips, told analysts and media yesterday.
“What’s in Morrisons favour is that management does realise that it has got these challenges to overcome,” said Robinson. He highlighted the group’s decision to open its first convenience M-Local store in London as a “positive move”. The retailer is planning a much bigger focus on M-stores next year, at the expense of plans to expand space at its current stores.
Robinson also believes the firm’s go-slow strategy in online retailing could pay off, assuming Tesco leaves some floating customers to sell to. “Morrisons hasn’t just gone in and tried to replicate what Tesco and Sainsbury’s have done,” he said.
Philips, meanwhile, flatly rejected assertions that Morrisons’ focus on fresh and chilled food is not paying off. In the 45 stores where this format has been launched, like-for-like sales are up by between 4% and 6%. “They are not disenfranchising customers in any shape or form otherwise sales wouldn’t be so strongly up,” he said.
By the end of the year, Morrisons expects to have 100 “fresh format” stores that will account for close to one third of group sales. At the same time, Morrisons’ private label range, M Savers, has seen a strong double-digit sales rise, indicating that ‘everyday low value’ remains a key part of the firm’s mantra.
All of theses processes, though, will take time to blossom. For a variety of reasons, Morrisons finds itself in an unwinnable position over the short-term. If I was investing to make a quick buck, I probably wouldn’t be knocking on Morrisons’ door.
If there is one relevant criticism to be levelled at current Morrisons management, then perhaps it is the apparent zeal for fighting on all fronts, all at once. Even the most junior military strategist knows this is high-risk stuff.
Yet, there is much to be done. We likely won’t know for another six to 12 months whether Morrisons is carving out a future for itself, or a dead-end. But, Morrisons’ proactive approach is a good sign.