The surprise appointment of Loblaw COO Dalton Philips as Morrisons chief executive has prompted a measured response in the market. Impressive CV aside, Philips remains a relatively unknown quantity in UK retailing, prompting analysts and investors alike to adopt a ‘wait and see’ approach. Nevertheless, the question on everyone’s lips is whether Philips will usher in a new strategic direction at the UK’s fourth-largest supermarket group. Katy Humphries reports.
In recent years, Morrisons’ growth has outpaced its larger UK rivals, Tesco, Asda and Sainsbury’s. The supermarket operator’s strategy of focusing on its core food offering, upgrading its existing stores and expanding in the south of the country, where it is under-represented, has proven effective.
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Nevertheless, concerns that this direction will only reap rewards in the short term have hounded management and, time and again, the group has been confronted with the question of whether it will diversify its operations.
Under former chief executive Marc Bolland, Morrisons remained steadfast in its insistence that it needed to get its core grocery offer right and develop into a nationwide retailer before it looked at more ambitious expansion plans.
However, according to some analysts, the board’s appointment of Philips could signal that the time is now ripe for Morrisons to follow in the footsteps of Tesco, Asda and – to a lesser extent – Sainsbury’s and expand its business in new directions.
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“There are potentially some big strategic questions to be answered,” Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, tells just-food. “Are they going to look at expanding into non-food, the Internet, or even develop a loyalty card?”
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By GlobalDataAccording to Bowman, investors are “generally pleased” that Philips has a “fairly diverse” background, as his experience of general merchandising and (admittedly less likely) of international retailing could prove invaluable if the company does look to new avenues to drive growth.
Since January 2007, Philips has served as chief operating officer at Canadian grocer Loblaw, where he worked under one of the architects of Asda’s turnaround, Allan Leighton.
Loblaw, Canada’s largest supermarket group, had been struggling as stiff competition from the likes of Wal-Mart, a decrepit store network and poor logistics and merchandising were dampening sales and profits.
However, under Leighton’s management team, the company has slowly turned its fortunes around.
Indeed, TD Securities analyst Michael Van Aelst recently upgraded Loblaw to ‘buy’, claiming that the company had made “meaningful improvement” in its operations.
According to Van Aelst, by the second half of 2010, “Loblaw should start experiencing improving demand, a return to normal promotional levels and food inflation, further merchandising and supply chain efficiencies, and improved performance in its renovated stores.”
Philips was shipped in to join Loblaw’s turnaround efforts by the Weston family, who hold a controlling stake in the supermarket group. Previously, he served as CEO of Irish department store group Brown Thomas, also part of the Weston empire. To many hopeful investors, Philips’ experience of general merchandise retailing is a positive sign that Morrisons could be preparing to expand its non-food range beyond the kitchen accessories it currently stocks.
Prior to this, Philips worked in the international division of Wal-Mart, where he rose to chief operating officer of German operations before the company quit the market.
Again, observers have suggested that this experience could come in handy if, somewhere down the line, Morrisons were to attempt to develop in overseas markets.
To many, the appointment is particularly poignant as it could provide an insight into how the Morrisons board – and powerful founder’s son, significant shareholder and former chairman Sir Ken Morrison – sees the company developing.
As ShoreCap’s Darren Shirley tells just-food: “Philips has a high level of experience in general merchandising and international. Whether this suggests that the Morrisons board has realised that the company needs to diversify to sustain growth is interesting.”
While Shirley acknowledges that expansion into general merchandise would be a step-change in strategy for the company, he adds that this is a “well-trodden path” that three of the country’s big four have already decided to follow.
In diversifying, Morrisons would answer its critics accusations that its growth strategy – while currently effective – is limited in the longer-term.
“There is good medium-term growth in Morrisons doing what they are doing – focusing on grocery and opening supermarkets in the South. But that they are opening supermarkets rather than larger susperstores does suggest the limitations of that growth,” Shirley says.
However, while many in the investment community regard Philips’ appointment as a herald of things to come, there are those that suggest his relative obscurity in UK retail says more about the board’s motivations than his past experience.
“That they’ve appointed a relative unknown suggests that the board wants to mould him rather than the other way around. They probably said ‘this is our core strategy, you can change some bits around the edge, but this is where we are going’,” one analyst suggests.
Before it can be determined whether the appointment was motivated by a desire for change or continuity at Morrisons, we will have to wait for Philips to complete his assessment of the business and settle into his new post.
It is unlikely that the watching investment community will get a real indication of where Philips wants to take the business before the fourth quarter of this year or first quarter of the next.
Nevertheless, when Philips joins Morrisons in March the pressure will be on for him to deliver growth without sacrificing the company’s core strengths in food retail.
