The UK’s fourth largest supermarket, Morrisons, today (7 November) showed further signs that its sales are struggling amid tough competition in the marketplace. The grocer is continuing to make positive strides, but the questions over whether this is enough and whether Morrisons has its proposition right still linger. Michelle Russell reports.
Morrisons this morning (7 November) saw its share price fall after it booked a drop in like-for-like sales in the third-quarter. Like-for-like sales fell 2.4% in the three months ended 3 November, while total sales were up 1%.
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The decline makes Morrisons the worst performing major supermarket in the UK and marks a further deterioration for the Bradford-based company as it faces fierce competition from discounters Aldi and Lidl.
The grocer blamed a challenging backdrop and heavy promotional activity across the industry for the fall, but revenues also suffered due to Morrison’s lack of an online grocery offer and its low exposure to the convenience sector.
With negative like-for-like sales during a period of food pice inflation, it would seem Morrisons volumes remain particularly weak. While Morrisons did not provide any volume figures for the quarter, the UK food industry has increasingly become characterised by falling customer loyalty and low volume growth. This, in turn, is being met by heavy promotional activity among the large players and Morrisons has indeed reacted.
The retailer will continue to face challenges in the short term as it attempts to play catch up with rivals.
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By GlobalData“Despite Morrisons stating this set of results is ‘in line with expectations’, the grocer continues to struggle,” said Conlumino analysts. “In spite of a small total sales increase, LFLs once again fell as competition in the food and grocery market remained intense.”
Shore Capital analyst Darren Shirley concurred.
“With such weak trading Morrison has once again endured a period of losing market share in the UK. With management talking of inflation of c2.5-3% (both for Morrison and the industry), this implies a LFL volume contraction across the core estate of at least 5%. Such sustained pressure will surely have resulted in further negative operational gearing and margin pressure.”
The analysts believe Morrisons is unlikely to see any major changes until it begins to see the benefit of its convenience market entry, and its online grocery offer finally launches.
In this regard, the grocer has been making strides in the right direction. The retailer will start home deliveries in January through a tie-up with Ocado.
The group is understood to be launching its offer in Warwickshire initially after striking a deal to launch its own home delivery service with online specialist Ocado in May.
CEO Dalton Philips, however, claims Morrisons’ will offer online shoppers something that is not available on the market. “The combination will be a strong fresh food proposition, delivered well. It’s not being offered out there in the market today,” he said in September.
The retailer is also expanding its chain of ‘M local’ convenience stores, opening 36 in the three month period, bringing its total to 69. It plans to open a further 100 M local’s in the 2014/15 financial year.
“C-stores will be crucial in driving the business forward, and ensuring it gets a solid foothold in this market will prove increasingly important in the months to come,” said Conlumino. “However, issues exist here with higher running costs at these stores pushing prices up, conflicting with the retailer’s value-focused proposition. This has not proved a major issue as of yet, with existing and new customers impressed with its focus on fresh food and produce; however it needs to continue allying this with its commitment to low prices to ensure its success is guaranteed in this growing market.”
Whether this is enough for Morrisons to claw back some market share is still questionable. Does the retailer have the right proposition to achieve that?
The group has always believed that success will be driven by the things that make it distinct, namely its focus on freshness.
Yet there are some in the industry that doubt whether Morrisons has got its core message right, arguing that ranging initiatives and the fresh focus have caused the group to lose touch with its core consumer.
Morrisons, however, is not alone in it struggles.
“Despite the improving economy and a rising population, volumes still fell, suggesting that control of basket size through more segmented shopping, careful stock management of larders and tight wastage management remain the legacies of the deep consumer recession for many households,” said Shore Capital analyst Clive Black.
“Assuming sales from space growth of c2% and food inflation of maybe 2-3% then LFL volumes for the main players are weak, implying the risk of negative operational gearing. For 2014, three year industry comparative are favourable, and maybe with economic growth in tow this will signal a change in fortunes?”
Nonetheless, Conlumino believes Morrisons is “moving in the right direction”.
“In a crowded and competitive marketplace, the Big Four are under threat from every direction, and Morrisons must continue taking proactive steps to ensure it has the relevant armour needed to protect itself from its competitors in the battle for grocery spend.”
A cloud will hang over whether these proactive steps are the right ones, however, until the results begin to bear fruit.
