Despite posting its first rise in underlying profits for five years, shares in Morrisons closed down over 6% yesterday as group warned of “uncertainties ahead”, especially around the impact on imported food prices if sterling stays at lower levels.
Chief Executive David Potts said that increasing petrol prices had already prompted some customers to switch to cheaper own label products, a trend that is likely to continue as food prices adjust to reflect the falling purchasing power of the pound. “So far we have seen a slight shift into own brand from customers who are looking for value,” he said.
After a prolonged period of food deflation, Potts revealed that prices in Morrisons stores were flat in the three months to 29 January, but increases were starting to come through as cost of imported food begins to rise. “Some [of the price increases] we try to hold off, some we try to reduce. But the trade can’t defy gravity,” he said, adding that shoppers would ultimately have to bear the strain.
However, he said the group was determined to be more competitive, saying: “We are blessed with vertical integration. Half of our fresh food we make ourselves. It’s a reason to remain cheerful in these turbulent times. We are not immune to changes, but we can be on the front foot.”
Morrisons is also facing other pressures on costs, including its pension scheme and higher staff pay, although it said it had a plan in place to help mitigate those costs through further savings across the business. It has identified future cost savings beyond its original £1bn target with plans to roll out a new automated ordering system this year across all product categories which will mean fewer labour hours, better availability, and reduced stock.
Despite warning of tougher times ahead, Potts said he was confident that Morrisons would continue to grow but stressed that it was still early days in its recovery process. However, analysts praised the progress he has made so far in the face of intense competition from the discounters.
Darren Shirley, an analyst at Shore Capital, said: “It is difficult to our minds to identify a misplaced foot by Mr. Potts since he took the reins of a somewhat problem Morrisons in spring 2015. The transformation of the business has been remarkable, a joy to chronicle in fact, Mr. Potts is displaying exemplary leadership skills but also, it should be said, a high level of entrepreneurship.”
He added: “Whilst much has undoubtedly been achieved in what has predominately been a Fix phase, which is not yet complete we should add, there is a lot to still come through in a measured and controlled manner, reflecting Mr. Potts considered nature, to our minds.”
Danielle Pinnington from Shoppercentric commented: “It seems Morrisons are reaping the benefits of putting the focus back on customers. As our own research showed at the beginning of the year, shoppers are looking for those retailers who deliver positive experiences instore. That means quality and service.”
Meanwhile, John Ibbotson from industry consultancy Retail Vision said that it was encouraging that Potts accepts that the Morrisons turnaround has only just begun. “It’s still the smallest of the Big Four, lacks scale and its market share is a fraction of that of Tesco. And the discounters, Aldi and Lidl, remain a genuine threat,” he said.
“There’s also the small matter of food inflation, although the falling Pound may hurt Morrisons less than its rivals, as a high proportion of its food is produced in the UK.
“However, cost cutting and the faster supply chain have raised efficiency significantly, while the ‘capital light’ wholesale deal with Amazon is a low risk way to make greater inroads into the online grocery market.
“Potts has a plan and for now it appears to be working seamlessly.”
- Although net margins have now reached 2%, Morrisons’ turnaround needs to be taken at face value, along with its ‘capital light’ partnerships with Amazon, Ocado, Timpson, Rontec and vertical integration in terms of UK food production.
- i.e. little harm in dove-tailing your trade strategies with Morrisons and capitalising on their journey back, from this new beginning..