Morrisons chief Dalton Philips today (12 September) insisted the “space race” among major UK grocers is “well and truly over” after the UK’s number four food retailer cut its capex budget for new supermarkets.

The retailer’s decision to lower its planned expenditure for its next financial year, combined with a higher dividend and a commitment to hand “surplus cash” to shareholders, over-shadowed a fall in half-year profits and sales and boosted its shares.

Over the last two decades, UK grocers, led first by Tesco, have invested heavily in new stores and buying property assets. However, the downturn has led UK consumers to become more value-conscious and less loyal to particular retailers. Shoppers have also turned more to convenience outlets and online, making it harder to eke out growth from larger stores. The UK’s major retailers – including latterly Morrisons – have invested in the convenience and online channels but there are signs some are focusing less on new larger outlets in response to changing consumer habits.

Morrisons’ decision today to cut its 2014/15 capex from a forecast GBP1.2bn to a revised budget of around GBP850m follows a similar announcement this spring from Tesco. In April, Tesco announced it would not build new stores on over 100 sites it owned and once intended to develop.

“Where there is a compelling case to build a new large store, we will take that opportunity [but] the future for us and the sector is no longer in building more and more big supermarkets,” Philips said at a media conference after the results were published. “The space race is well and truly over. The strategic decision we took not to bet the house on this race means we are in a strong position. It’s a choice we’ve made and we believe it chimes with the times.”

Morrisons has come under scrutiny from sections of the City in recent quarters as it battled weak sales, invested heavily in the convenience channel and upgrading some of its core stores, as well as improving systems and expanding online. 

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.

Company Profile – free sample

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 GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.

Alongside its first-half numbers, Morrisons set out a new financial strategy, which Philips said would focus on “profitable growth, cash generation and delivering superior returns for shareholders”.

A plank of that strategy is a review of Morrisons’ property estate, which it claimed had a market value of GBP9bn. Philips said the retailer wanted to “unlock value from our property portfolio”.

The majority of Morrisons’ stores are freehold, although the company was coy on its plans. Finance director Trevor Strain said the review did “not necessarily mean” Morrisons would look at selling and leasing back some of its stores.

He said: “The review is ongoing and will run through to the prelims in March and we’ll talk through what our plans are then. A couple of points I would make: I talked in the presentation earlier not just about our trading estate, I talked about our investment properties. The second point I really want to emphasise is that we are an overwhelmingly freehold business. We are a business with conservative approach to running the finances with the company and that won’t change.”

While analysts welcomed Morrisons’ announcements on capex, its property review and the prospect of returning cash to shareholders, there remained some concern over its sales and profit performance.

In recent quarters, Morrisons admitted its sales suffer after misfiring advertising and loyalty programmes that failed to hit the mark. A new ad campaign and loyalty schemes, including money-off coupons, have slowed the decline – first-quarter like-for-likes were down 1.8% – but analysts said the improvement was less than the market expected.

Pre-tax profits dropped 21.8% while underlying pre-tax profits, which stripped out items including costs linked to the development of its convenience and online businesses, were also down, by 10%.

Strain said underlying profits fell due in part to Morrisons’ moves to invest in price to try to boost sales, which he expected to improve as the retailer moved through its financial year.

“Overall consensus for the full year on like-for-like is -1.2%. Obviously we are a bit behind that in half one, so we see an improvement across the second half as a whole,” he said.

Asked when Morrisons expected to see its like-for-likes return to growth, he told just-food: “You’ve got to remember our like-for-likes are not on an apples-and-apples basis as we haven’t got any convenience or in it so, until we be in these channels at a meaningful scale, we’re gonna cont to be on that measure behind the market on a simple like-for-like.”

Morrisons often emphasises its vertically integrated supply chain, in which over half of its own-label lines are made at manufacturing sites it owns.

The horsemeat contamination saga earlier in the year has, Philips said, made consumers more interested in where their products are made. Asked whether the retailer was disappointed about its sales performance given that interest, Philips said: “We’re encouraged in the direction of travel. Horsegate gave us an opportunity to really talk about the point of difference. Previously we couldn’t talk about our abbatoirs. Consumers didn’t want to talk about it. Horsegate has allowed us to talk about that.

“I go back to the fact that these are two big channels growing very quickly. Bricks-and-mortar retailers in the UK, volumes and sales are in decline. And we are in decline, too.”