Morrisons says emphasis on fresh food will enable new online business to stand out from competitors

Morrisons says emphasis on fresh food will enable new online business to stand out from competitors

After recent criticism in the City, Morrisons last week sought to soothe any anxiety among investors.

Even as it reported lower half-year sales and profits, the UK retailer in some ways succeeded - its share price jumped - but the country's fourth-largest grocer still faces challenges within its core business and with its newer ventures in the convenience and online channels.

Morrisons has been under scrutiny as its performance stuttered in recent quarters. The retailer posted a fall in sales and earnings for the 12 months to 3 February. Its slowness in opening convenience stores and offering home delivery, often criticised by analysts, hit the business. The channels are two areas of the mature UK grocery market still in rude health.

There have also been concerns Morrisons lost touch with its core consumers. Missteps in marketing and in its promotional strategy meant the retailer's core supermarket business has also come under pressure. As, for example, Morrisons' key rivals, Tesco, Asda and Sainsbury's, were giving consumers money-off vouchers to encourage more shopping trips, the retailer was brushing most of the schemes off as "gimmicks". Morrisons has since launched what it has called an "intelligent" voucher scheme.

In convenience and online, Morrisons has, to its credit, grasped the nettle and made significant investment. It expects to have 100 of its M Local convenience stores open by the end of its current financial year. In January, Morrisons will launch its home delivery service, morrisons.com, in a venture with Ocado. Morrisons has also looked to sharpen its marketing and has lowered prices.

These initiatives meant Morrisons saw first-half profits fall year-on-year. Reported earnings dropped on the back of the expansion of its convenience store network and on its online plans. Underlying profits, which stripped out that spending, was in part down due to the money Morrisons had invested in areas like price to try to win back consumers.

Morrisons' shares, however, rose after the results were announced. An increase in the dividend and, crucially, a cut to the capex budget for its next financial year boosted Morrisons' shares even as it reported lower sales and earnings.

The retailer plans to spend less on opening new supermarket space, with CEO Dalton Philips insisting the "space race" among UK grocers is "well and truly over". The capex cut, combined with a review of its property portfolio (which Morrisons said is valued at GBP9bn), could, it announced, lead to "surplus capital" being returned to shareholders.

"Our strategy for growth in convenience and online is now set. Today we are outlining our financial strategy, which will support our key financial objectives of growing underlying earnings, generating cash and delivering superior total shareholder returns," Philips said.

However, the performance of Morrisons' core business and the prospects for its newer ventures mean it will remain under the spotlight.

Like-for-like sales were down again in the second quarter. Morrisons said that metric improved compared to quarter one but the improvement seen during the quarter (when like-for-likes fell 1.4%) compared to the first three months of the financial year (when like-for-likes were down 1.8%) was weaker than the market had expected. Morrisons insisted it expects further progress during the rest of the financial year, although it and the market still expects like-for-like sales to fall 1.2% over the year. It could be argued Morrisons may have expected more rewards for its investment in price. The UK remains a tough market in which to win over shoppers and it is by no means certain Morrisons will definitely hit that forecast.

In Morrisons's case, the fall in sales has another impact. Morrisons has a vertically-integrated business, in which over half its own-label fresh food comes from plants it owns. Lower sales can, for a business like Morrisons, lead to what analysts call "negative operational gearing".

As for convenience and online, with Morrisons late to the party, its rivals have built sizeable businesses in both channels. Philips said fresh food would help Morrisons' online business gain ground when it starts in January. The novelty factor and consumer curiousity will likely help morrisons.com in the early weeks but it will be challenging the likes of Tesco, Asda and Sainsbury's, rivals that are well-established in the channel.

Morrisons may have set its strategy for convenience and online. But getting results from those new ventures, while shoring up it core business, will present a challenge.