Slow growth at Morrisons as food price inflation drops back

SUPERMARKET chain Morrisons has suffered a sharp drop in underlying sales growth due to the disappearance of food price inflation, pegging back its long-standing outperformance of rivals and hitting its shares.

• Lib Dem leader Nick Clegg drops in on a Morrison store during the election campaign. Picture: PA

Some analysts expressed disappointment that like-for-like sales rose just 0.8 per cent in the 13 weeks to 2 May.

Citi's Alastair Johnston said: "Morrisons is no longer outperforming the sector to the degree we have become accustomed to over the last two years."

Analysts had expected Morrisons' first-quarter underlying sales to grow by up to 3 per cent following a 4.8 per cent increase in the fourth quarter.

There has been a steep fall in food price inflation, although there are signs this will reverse as the year progresses.

Morrisons' finance director Richard Pennycook said he did not expect deflation, and that inflation would tick up in the months ahead.

Collins Stewart analyst Greg Lawless said the weak sales figures from Britain's fourth-biggest supermarket chain suggested the overall UK grocery market was "barely flat" and that underlying sales were perhaps falling at rivals Asda and Sainsbury's.

Retailers are wary that steps to cut UK government borrowing, like higher taxes and public spending cuts, could hit consumer spending.

Pennycook said Morrisons was well placed to cope, thanks to its focus on low prices and promotions such as a "price crunch" week at the end of the first quarter, during which the group lowered prices on about 3,000 products.

Competition was intense, but not dramatically different from the run-up to Christmas, and a pick-up in demand for premium ranges towards the end of last year had continued to a certain degree this year, he said.

The supermarket said: "Although we remain cautious on the economic environment and consumer spending, our expectations for the current year remain unchanged."

Analysts currently expect Morrisons to bank an underlying profit of 870 million for the year ending January 2011, up from 767m the year before.

Analysts said Morrisons' shares trade below Tesco and Sainsbury's on the multiple of forecasted earnings amid concerns the firm could fall behind rivals as it is not expanding in non-food markets or online.

Some in the City hope new chief executive Dalton Philips, who joined last month, will outline a more ambitious growth plan. He is due to give his initial thoughts on the group alongside interim results in September.

Pennycook said Philips was immersing himself in the business and had met all the group's 400-plus store managers, as well as spending a week at an outlet in Harrogate.