MORRISONS’ results send mixed messages as it awaits the new chief’s arrival, writes Martin Flanagan.
The latest annual trading results to be released on Thursday from the Morrisons supermarket giant, Scotland’s third biggest grocer, will inevitably have a sense of the intermission about them.
Potts will dust down that strategy, sharpen it and execute it with more vigour
Dalton Philips’ ill-starred five-year tenure at the helm ended with his abrupt ousting in January. And his successor, the highly rated ex-Tesco veteran David Potts, doesn’t arrive until 16 March.
Instead, Morrisons chairman Andrew Higginson and acting chief executive Trevor Strain, both also former Tesco senior executives, will present the figures to February 2015. But even though profits are set to halve, the story unfolding is that things are getting better.
A final nail in Philips’ coffin was when Morrisons’ underlying sales fell 3 per cent in the run-up to Christmas. However, the City expects some momentum from his dramatic changes early last year to show through.
The analyst consensus for annual like-for-like sales is a fall of 5.9 per cent, with some thinking it will be even better, at minus 4.5 per cent – either would be an improvement on the shocking 7 per cent slump in same-floorspace revenues a year ago. The underlying “clean” pre-tax profit is £342m, down from £785m in the previous year.
Philips bequeaths to his successor a pledge of £1 billion of Morrisons’ prices cut over three years, a new loyalty card to confront the plundering of discounters Lidl and Aldi, an accelerated rollout of MLocal convenience stores and an online operation.
It is noteworthy that few Morrisons followers expect Potts to make big strategic changes when he is established. Rather, they are looking for an on-the-ground operational improvement at the cutting edge of the group’s relationship with customers – perhaps sharper marketing, sharper store layouts, with more bodies on the shopfloor and fewer in the back office.
Analysts certainly don’t expect from Potts any repeat of new Tesco boss Dave Lewis’s whirlwind of announcements in January after just four months in the job. That included a head office closure, loss-making store closures, the scrapping of major store openings, binning final salary pension funds and halving sales of businesses and capital spending.
“There is not the scope at Morrisons to make the sort of splash Lewis did at Tesco as it is a much smaller business, less complex and less diversified,” said one source.
“It is more likely that the group’s new Tesco-across-the-water top team will make the supreme focus the performance of the group’s main supermarkets [60 of which are in Scotland, where Morrisons has a market share of about 13 per cent].
“People hoping for a lot on the convenience stores and online are likely to be disappointed.”
Many analysts also think Potts is limited in making the company any more price-competitive. After what, in effect, became the doomed Philips’ last throw of the dice, Morrisons is seen as having one of the strongest price positions on the supermarket block. That has been at the cost of savaged profit margins, with an estimated 150 basis points lost in the latest financial year.
By contrast, it would be surprising if the new chief executive did not find extra overhead cuts, even though the group’s net debt is expected to have already fallen by £400m to about £2.4bn. Kitchen-sinking and chief executives go together like bacon and eggs. Broker Jefferies believes “a de-layering of in-store management” might be in the pipeline. There’s also speculation that a dividend cut is on the way.
But opinions are more divided on what Potts will make of the unique selling point (USP) of Morrisons: owning much of its own production, such as bakeries, fishmongers and abattoirs.
Clive Black at Shore Capital said: “Morrison’s has adopted an appropriate strategy, going back to a stronger and more simple offer, but it has not been executed with gusto or consistency.
“Hence, we think David Potts will dust down that strategy, sharpen it and execute it with more vigour and pace, perhaps with some new players on his team.
“Morrison’s has one or two distinctions that need to be re-found, re-established and sold to its customers. In particular its Market Street offer, which has been over dumbed down and industrialised, its vertical integration and, in this respect, its Britishness. We would expect each of these issues to be more effectively extolled.”
But Rahul Sharma, supermarkets guru at broker Neev Capital, has his doubts. “I don’t think there will be any sacred cows in any strategic review,” Sharma said. “Morrisons’ big thing has often been that they own a lot of their production. But I think Potts might take a hard look at how much they actually do gain from this.”
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