Morrisons said today (19 November) that its third-quarter like-for-like sales growth had slowed. The news, coming hot on the heels of CEO Marc Bolland’s announcement that he is moving to Marks and Spencer, could be seen as a further blow for the UK supermarket chain. However, it could also be a sign that it is time for a fresh face at the top, someone who will address the longer-term strategic questions of expanding into non-food and online. Katy Humphries reports.
It has been a question that has cropped up for the past three years, Morrisons chief executive Marc Bolland joked during a conference call this morning. When will Morrisons begin to take advantage of the immense growth opportunity presented by non-food and online retailing?
His answer today, as it has been in the past, was to emphasise that Morrisions is focusing on its core food offering and, particularly, on its Market Street concept, which it views as a unique selling point.
Since Bolland took the helm at Morrisons in 2006, the company has witnessed a remarkable turnaround. As Richard Hunter, head of UK equities at Hargreaves Lansdown tells just-food, when Bolland joined Morrisons, it was a company “on its knees”, struggling to swallow its massive acquisition of Safeway and issuing back-to-back profit warnings.
Bolland has steered the group through sometimes choppy waters, dramatically improving sales and profitability. Between the first half of 2006 and the first half of 2009, Morrisons enjoyed a near-quadrupling in profits, which rose to GBP449m in the first six months of this year.
A key plank in Bolland’s strategy has been a ‘back to basics’ approach, focusing on the rejuvenation of Morrisons’ core food business.
Two years ago, Morrisons signalled its intention to reposition itself as “the food specialist for everyone”, introducing a new logo and replacing its old slogan “more reasons to shop at Morrisons”.
This rebranding has proven a hit with consumers, Morrisons claimed today, with footfall jumping by over 1.6m to a “record” 10.8m customers a week coming through its doors.
Understandably then, given Bolland’s success at the group, yesterday’s announcement that he is leaving the company to become CEO of Marks and Spencer was seen as quite a blow, causing Morrisons’ share price to shed around 5% of its value.
However, while he undoubtedly leaves Morrisons’ food activities in good shape, the company’s disappointing 4.3% like-for-like growth beggars the question of whether Morrisons previous stellar performance is sustainable, given the company’s current strategic direction.
Since Morrisons embarked on its turnaround strategy, the company has seen sales growth ahead of the market. However, today’s like-for-like performance trails that of the retailer’s competitors – with Asda and Sainsbury’s posting gains of 5.6% and 5.4% in their most recent quarters.
During the company’s media conference call, Morrisons’ management insisted the difference was the consequence of lower inflation, tough comparables with last year when the company saw same-store sales jump 8.2% and the weight of new sales at recently-opened stores.
“We said a while ago – back in ’09 – that the balance of our growth would move to new space as we expand in the south,” finance director Richard Pennycook emphasises.
Indeed, Morrisons’ total sales growth remained ahead of the market at 9.1% and the group gained share in the period.
Management firmly asserted that the company’s “clear strategy” was paying off – and would continue to pay off – seemingly ruling out any move into online or non-food retailing. The message: growth is sustainable without a radical rethink of strategy.
Nonetheless, there is a limit to the amount of geographical expansion that can be milked out of the already saturated market in the south of England, where Morrisons has focused its programme of new store openings.
Analysts are divided on whether a fresh direction would benefit Morrisons.
In a note to investors, Citi analysts warn that the “key risk” in this situation is that “Morrisons appoints someone external who may seek to change the company in a radical fashion”.
However, while Bernstein analysts acknowledge that Bolland’s departure is a “near-term blow”, they also suggest that in the longer-term “the change may facilitate Morrisons addressing a series of broader strategic questions”.
“Under Marc Bolland’s reign, Morrisons has re-focused on its core “food” business, eschewing alternative growth avenues (e.g. non-food, c-stores, internet, loyalty cards, international etc). With the core business in a significantly better place than when Bolland joined the company, a new CEO may be more willing to consider these alternative options,” they write.
Sir Ian Gibson, the chairman of Morrisons as well as head of the company’s nominations committee, says that the company expects to appoint a replacement for Bolland sometime in the New Year.
However, he emphasises: “The team we have here is running the business very successfully, with a clear strategy… We are not in any sense of panic.”
Gibson has indicated that the company is considering both internal and external candidates.
Analysts say external candidates could include Tesco marketing director Richard Brasher, Tim Mason the chief executive of Tesco’s Fresh & Easy business in the US, Asda’s merchandising chief Darren Blackhurst – and M&S finance director Ian Dyson, who was also tipped as a contender for Bolland’s new post. The leading internal candidate is believed to be Pennycook, who served as interim chief executive before Bolland took over.
The appointment of Bolland’s successor will be a pivotal moment for Morrisons. The Dutchman has certainly got the supermarket group back on the right track and is leaving the company’s core business in good shape.
Going forward then, the question will become whether future growth requires a broadening of the company’s focus, following in the footsteps of its peers Tesco, Morrisons and Asda to branch out into the fast-growing areas on non-food and online retailing.