The average UK shopper visits the supermarket nine times a week; online grocery shopping is up 20 per cent. Both of these statistics were presented alongside Wm Morrisons’ latest preliminary results. ‘Grocery buying has moved on,’ explains Niall Addison, head of investor relations at the UK’s fourth-largest supermarket. ‘It has moved online and toward the smaller convenience store format.’
Making the most of the two fastest growing parts of the grocery market will set the tone for what management tells investors as it heads out on its roadshows across the UK and the US. These areas are also the reasons behind the supermarket’s recent glut of media attention.
In March this year, Morrisons announced the £32 mn ($52 mn) acquisition of a 10 per cent stake in FreshDirect, the Manhattan-based online grocery retailer. At the same time, the supermarket, headquartered in Bradford in the north of England, announced it would begin trying out its first three convenience stores under the name M Local.
The supermarket’s largest shareholder, the Morrison family, will also be digesting news of revenues being up 13 per cent, dividends up 17 per cent and a commitment to increase dividends by at least 10 per cent annually over the next three years. On top of this, the supermarket announced a £1 bn share buyback over two years.
Deciding between a dividend and a buyback was straightforward, according to Addison. ‘We asked our major shareholders what they would prefer and a buyback was top of the agenda,’ he says. Major institutional investors include Blackrock, Legal & General and San Diego-based Brandes Investment Partners.
An inconvenient truth
But no amount of good news can hide just how slow the supermarket has been to react to the change it has flagged in UK shopping habits. Morrisons has no online grocery service of its own, and none is expected until 2013. As Addison points out, however, selling online groceries is not so important to the bottom line – unlike the convenience store market.
Typing the postcode for the London Stock Exchange (LSE) into the store finder function on Morrisons’ website returns the nearest store 2.48 miles away. Repeating the exercise for Tesco, the largest of the UK’s big four supermarkets, returns 50 stores within the same radius. ‘There are still a lot of people who live too far away from a Morrisons store,’ Addison admits. Only Asda, the Wal-Mart subsidiary, has a central London store farther from the LSE.
With Tesco an established southern runner, it may seem an unfair comparison. But rerunning the same store finder exercise using the postcode for Morrisons’ headquarters shows Tesco competing with Morrisons store-for-store: the nearest Morrisons store is 0.64 miles away, the nearest Tesco 0.95 miles. Even Waitrose, the most ‘southern’ UK supermarket, is only six miles away. Nor does Morrisons view itself as a northern supermarket anymore. ‘If you think of the UK as divided into north and south, Morrisons has more stores in the south,’ Addison says.
The strategy in 2010 was to boost the number of stores in the south and the ongoing significance of this can be seen in Morrisons’ new strategy for 2011. ‘Convenience shopping is here to stay; convenience stores are an easier route into the south,’ Addison points out. ‘Getting planning permission for a 30,000-square-foot store is much harder in the south.’
Morrisons plans to open 2.5 mn square feet of new space over the next three years. This still puts it behind the top two supermarkets’ expansion plans, and Tesco already has more than 2,000 more stores in the UK. It also has more than 1,000 convenience stores, and has had an online grocery business since 2000. ‘Detractors will say we are under-represented in both and should have done it a lot earlier,’ says Addison. ‘But we had enough on our plates sorting out the core business.’
The Morrisons backstory began in 2004 when the supermarket acquired its larger rival Safeway, which had been sold by US parent American Safeway in 1987. In 2004 Safeway was the fourth-largest UK supermarket chain with 479 stores: Morrisons had 119.
‘Before the acquisition, Morrisons was a northern regional retailer lacking scale,’ Addison concedes. ‘It has been a long transition. It was a bit of a shambles back then: in 2005 the business lost money and the plan then was to stabilise the business and integrate the group.
‘We achieved that. Then we lost [CEO] Marc Bolland to M&S. Now we have a new chief executive, Dalton Philips, the core business is solid, and we are entering the next stage of development.’
The banner for that stage is ‘Different and better than ever’ and an early call-to-arms under the new leadership has seen the supermarket follow its rivals into selling non-foods. In February, Morrisons announced the £70 mn acquisition of Kiddicare, a leading online retailer of baby goods in the UK. It is also reported to be in discussions with George Davies, founder of fashion labels for Asda and Marks & Spencer, about a move into clothing.
Each forward step it makes inspires comparisons with its rivals, but Addison maintains the supermarket is committed to doing its own thing. It will not, for instance, be following Tesco into financial services or mobile phones. ‘We are a food retailer, first and foremost,’ he says.
Of more pressing concern, therefore, are the rising tax, unemployment, commodity prices and inflationary pressures driving down average UK households’ weekly shopping budgets, as much as £400 mn extra of which is going on fuel. ‘This is money they won’t be spending in store,’ notes Addison.
Morrisons is a leading fuel retailer in the UK and the rise in fuel prices accounts for nearly 40 per cent of its increase in revenues when compared with last year – virtually the same increase as the figure for new stores. Like-for-like grocery sales (excluding fuel) are up less than 1 per cent, compared with 6 per cent the previous year. In these difficult trading conditions, Morrisons is relying on freshly prepared foods and its control of the supply chain to differentiate itself from the other big four supermarkets.
Now that it has caught up with the changing face of grocery shopping, it must be time to change the face of its grocery shops. But management will not be rushed: its slow and steady approach to trying out convenience stores and taking a minority stake in an online retailer speaks of a team yet to be convinced.
Management is also cold about the media’s obsession with jockeying for market position. Addison dismisses Morrisons’ fractional drop in market share, reported in December, as not meaning much. ‘We don’t get up every day thinking, We have to grow market share. If it happens, it will happen naturally. Do I see us being Tesco in five years’ time? Absolutely not!’