Morrisons CEO Dalton Philips has begun to work on delivering his big ambitions for the UK’s fourth largest grocer.
Back in September, after some six months in the job, the newly appointed Philips announced a raft of initiatives Morrisons planned to roll out. Yesterday (10 March), he updated the market on how the retailer was tracking against these bold plans.
Go deeper with GlobalData
Against the backdrop of results that were described by analysts as being “in-line with expectations”, Philips updated the industry on the retailer’s new management structure, its renewed focus on fresh food and the development of its own brand, space optimisation strategies, aggressive expansion, as well as initiatives to enhance its “service culture”.
However, the big news was the company’s acquisition of an approximately 10% stake in US online grocer FreshDirect: a GBP32m (US$51.3m) move that, he said, would help it to develop an online grocery offer in the UK.
While the acquisition of a stake in FreshDirect came as somewhat of a surprise, it makes sense given Morrisons’ Kiddicare acquisition and suggests Philips and CFO Richard Pennycook plan to bring in the expertise they don’t have in-house through acquisitions.
Speaking about the plans, Pennycook said the company’s online strategy allows it to “leapfrog the pain others have been through” in the “long and hard journey” toward developing a “profitable” online model.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataCommenting on the retailer’s online strategy, Bank of America Merrill Lynch analyst John Kershaw said: “With this ‘invest and learn’ approach to online grocery, Morrison clearly is not diving in at the deep end with a store-based pick model for grocery online. This may, in time, prove smart but today means that its customers will likely have to wait a while before getting a chance to shop Morrison online.”
Indeed, the announcement means that the retailer’s online grocery trial, which had been scheduled to begin this year, will now be put back for another two years. Assuming the company feels certain it can launch profitably online, the trial will now go live 2013/14.
The announcement also put to rest months of speculation that the retailer was considering buying UK online grocer Ocado, a move that seems even less likely in retrospect, when you consider Philips’ scathing appraisal of the online grocery sector in the UK.
Speaking at a press conference yesterday, he said be believes that none of its rivals have “cracked fresh food online” or “managed to create a significant point of difference”. Additionally, he said that he doesn’t believe “anyone is profitable in UK online today”.
The retailer plans to launch the service in London, but it is unclear if this will be scaled up nationally. Speaking to just-food yesterday, Philips said that “if the model can work [profitably] across the UK, we will [launch it]”.
However, Kershaw highlighted concerns around its lack of an online strategy for the rest of the UK.
“Based on Morrison’s FreshDirect investment, its initial thinking seemingly leans towards the view that online grocery remains a niche sport profitable only in affluent urban markets. Investors may want greater assurance that a more scalable, mass market, solution is within Morrison’s grasp in short-order,” he said.
Meanwhile, the retailer also announced it has found the first three locations to trial its convenience stores, which will be called ‘M local’, with the first store set to open in July.
Philips said the convenience channel is growing at “twice the rate of the UK retail markets” and that its ‘M local’ stores will offer a “differentiated fresh experience”, with the trial stores to be located on the M62 corridor.
While Morrisons has been active in the space race against competitors Tesco and Sainsbury’s, it stepped up its growth commitments yesterday with plans to open around 2.5m sq ft of space over the next three years.
Kershaw described the plan as “bold and ambitious”, particularly as “Morrison will be attempting to open up space in the more competitive South / South East property market.”
Speaking about its growth plans, Philips said that planning committees tend to look favourably on the retailer’s planning applications as they bring “real jobs to towns”.
However, with aggressive growth plans from all of the UK’s Big Four grocers, Kershaw said there “remains a possibility” that “some of the Big Four operators won’t deliver the space openings they have committed to”. However, he highlighted that Morrisons “is nothing if not conservative” so he expect that there will be “some internal visibility against its target”.
Morrisons is also progressing with a number of “self-help measures” to boost productivity including space optimisation, improved efficiency and improving indirect procurement costs.
It is working to “liberate” up to 15% of space internally through SKU reduction. The group launched its test in a store in Shrewsbury last week, with the number of SKUs being reduced by 16,000 and some 11% of space “liberated” in the store.
Philips also said that the early results of its labs trials are encouraging with fresh produce sales in the stores up 8%, butchery up 9%, deli up 31% and fresh flowers up 43%.
In terms of its plans to strengthen its own brand, Philips was particularly excited about his recent appointment of Belinda Youngs as own brand director, revealing that it has undertaken a “thorough own brand review”. Since the review in September, Philips said the group has grown its own brand by 5.1% and re-launched or added some 3,000 products. The retailer also is in the process of conducting a “through review” of its own brand range, with the results to begin being rolled out from the fourth quarter.
While Philips and Pennycook have set themselves stretching targets, entering incredibly competitive channels, Verdict analyst Matt Piner believes the retailer’s long term approach is the right one.
“The challenge now is that it will have to look at extremely competitive new areas in order to continue growing. Online grocery, convenience stores, non-food and own label ranges all present excellent opportunities if it can get them right, but they are all fiercely contested areas that will leave little room for error,” said Piner.
“Therefore we believe Morrisons is right to take the long-term approach, exploring each area fully, bringing in expertise and carrying out trials before committing.”
