Morrisons struggle to keep the core growing

What a difference two years can make.

Back in March 2012 I posted on how supermarket chain Morrisons had rejuvenated their core by focusing on communicating their fresh food offering, both in store with "Market Street" and in advertising. They had enjoyed several decent years, with 2011 turnover up 7% and profit up 8%.  

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Fast forward to March 2014 and the supermarket group announced underlying pretax profit for the year to February 2014, down 13% to £785m, on revenue 2% lower at £17.7bn. Even worse was a forecast for 2015 down by a further half. The news wiped, wait for it, a whopping £2billion of the stock market value of UK supermarkets, including Morrisons but also Tesco and Sainsbury's.

So, what went wrong?

1. Forgetting what made you famous?

Morrisons woes have been largely blamed on losses to the double discount whammy of Aldi and Lidl. Their combined share of 7% remains small, but it has doubled since 2003. Morrisons has suffered worse than some other chains, like Sainsbury's for example. This reflects the roots of the brand in being a value retailer based in the North of England, where the recession has bit hard.

Company patriach Sir Ken Morrison has been saying for a while that the brand had moved too far away from these roots and become too fancy. For example, Morrisons invested in equipment to blow mist over fresh vegetables, at a time when people were more interested in saving money.

This is a view shared by Bruno Monteyne, a Bernstein analyst, in The Times here: “Morrisons’ heritage is as a value retailer and we believe it is not too late to return to this base.” Clive Black, of Shore Capital, added that "Morrisons’ real problem was that it had “ostracised” its core customers."

2. Late with new distribution

Growing the core needs to be an ongoing process of renovation. And in retailing, route to market is clearly a massive challenge and an area where Morrisons do seem to have been lagging behind. First, more people are shopping online, with the pioneer Ocado being joined by Tesco, Sainsbury's and Asda. Morrisons is only now starting to offer an online shopping service. Second, more people are doing "top-up" shopping at small local stores. Again, Morrisons has been late to this party as well.

3. Neglecting the core

Morrisons stretched beyond the core by buying children's clothing brand Kiddicare at a cost of £163m, as well as the US online grocer Fresh Direct. As with Tesco's problematic US venture, Fresh & Easy, these non-core businesses could have diverted money, time and talent away from the core, at a time when it needed attention. The company has announced the sale of both of these businesses, to allow it to re-focus on the core.

So, what the hell to do? CEO Dalton Phillips announced that Morrisons will attack Lidl and Aldi head-on, with "£1bn to be invested in price cuts, promotions and store improvements, starting with £300m this year." The challenge with this approach is that the discounters have a low-cost business model, with much fewer product lines, more basic stores and no integrated supply chain (Morrisons has more of its own butchers, fishmongers and the like than any other supermarket). Can Morrisons really get close to the discounters on price AND have a distinctive fresh food offer at the same time? Time will tell. But it sounds hard to pull off doesn't it?

In conclusion, Morrison's problems show the need to remember and refresh what made you famous. If the company had been faster with channel innovation and kept prices a bit lower, perhaps it would be in better health. Having fallen behind, it is now forced into a risky and expensive re-launch.