Analysis: Facing up to the challenges at Morrisons

After a strong year in 2011, when profits rose and market share edged up, Morrisons has had a harder time of it since. At the end of last week the grocer reported a 2.1% fall in like-for-likes for the third quarter, a disappointing figure that nevertheless came as little surprise to many.

The poor performance was preceded by a slip of 0.9% in like-for-likes in the half year to July 29, giving an early hint of the difficulties the grocer has been experiencing. And market share figures from Kantar Worldpanel have already showed momentum has slowed, slipping from 12% in the 12 weeks to October 30, 2011 to 11.5% in the same period this year.

But before looking at any particular problems, it is worth considering the economic environment. Morrisons and the other grocers face a tough time – analyst Verdict predicts food inflation is likely to be as high as 3.4% in quarter four, and consumer sentiment remains resolutely dour. While food sales are not expected to suffer over Christmas, high food inflation is exacerbating the tight spending environment and eating away at squeezed disposable incomes. Shoppers are having to spend more just to keep up with last year’s level of consumption.

Morrisons has blamed the macroeconomic environment and, with wider market volumes declining, that is a valid argument for underperformance and no doubt explains part of the issue.

But Morrisons has some work to do as well – in many ways, the difficult environment simply makes hiccups more obvious. The grocer has several problems, ranging from worries over consumer perception to the products it is selling. It’s not helped by the fact that its grocery counterparts are doing comparatively well. Tesco’s £1bn turnaround programme is beginning to take effect, and Sainsbury’s and Asda have both performed well.

Part of the problem is Morrisons’ message. Neil Saunders, managing director at analyst Conlumino, says that there’s nothing wrong with the longer-term projects Morrisons is working on, such as the new Fresh store format and its supply chain investment. But the grocer also needs to focus on the here and now, he believes. Balancing short and long-term goals is what Morrisons needs to focus on.

Customer confusion

“Over the past 12 months the market has become a lot more price-sensitive,” Saunders says. “And there’s been a lot more activity from its competitors on price. Morrisons has been doing a lot of things, but not many of them have been to do with price, and it’s a little out of kilter with the market.” It doesn’t help that Morrisons’ customers are more price sensitive than those at Sainsbury’s and Waitrose, making them all the more likely to defect to Asda if they feel they’re not getting a good deal.

Morrisons’ Great British Price Crunch promotion has not gained traction with customers and its Fuel Saver deal – while a clever mechanism for those who understand it – is arguably too convoluted when compared with initiatives such as Sainsbury’s Brand Match, which customers find clear and easy to understand.

Shore capital analyst Clive Black agrees the messaging is slightly off, and that Morrisons needs to retain its core value proposition at the same time as improving the look and feel of stores. He says: “We are of the view that Morrisons has re-engineered its proposition in a way that is ‘disenfranchising’ its core customers. That change implies a move too far away too soon from its value roots to our minds. Correspondingly, we are of the view that Aldi and Asda in particular have been direct beneficiaries of this development, fascias that retain strong value credentials.”

Easy fix?

On the plus side, none of this should be too hard to improve. It might take a little while for marketing tweaks to filter through, but it’s certainly a lot easier than needing to force through fundamental changes. Saunders says it’s now down to Morrisons to get on with it. “They’re aware that they’ve got to go for long-term sales at the same time as focusing on short-term tactics. It’s quite an easy thing to fix. But whether they implement it is another story.”

In-store meanwhile, the refresh of 10,000 own-brand products does not appear to have captured the consumer imagination. Morrisons needs to persuade shoppers to put both its value M Savers range and premium products in the same basket to boost spend and returns on its own-label products.

In addition, morale on the shopfloor is unlikely to be high when company performance is low, and sources inside the retailer claim that some stores are understaffed and store standards have slipped.

The departure of commercial director Richard Hodgson shortly before Christmas will also come as a blow at such a vital time. Chief executive Dalton Philips – who has this year not only lost Hodgson, but also marketing director Richard Lancaster to Poundland and will next year wave goodbye to highly regarded chief financial officer Richard Pennycook – will be feeling increasingly exposed at the head of an underperforming business.

But Philips cannot be criticised for not being proactive – he’s introduced a new store format, kicked off Morrisons’ ecommerce arm, acquired Kiddicare and a stake in Fresh Direct, launched a convenience business, overhauled the grocer’s IT systems and set up a fledgling clothing operation. But it can be argued he has not been swift enough in implementing these initiatives.

Verdict analyst Cliona Lynch says: “The roll out of Fresh format stores is driving towards its goal of 100 by March 2013. With sales uplift of 4% to 6% in refurbished stores, it is imperative that the pace of roll-out quickens to mitigate against the decline in sales in older stores. The retailer’s convenience format, M Local, is on course to reach 20 stores by March 2013, but with only seven trading at present there is a lot to do.”

Crunch year

New convenience boss Gordon Mowat will play a key role in the coming year, and Philips will hope he is able to speed up the roll-out.

But while there might be some roll-out teething problems, in the longer term the new Fresh format may come good. Although founder Sir Ken Morrison has argued that Fresh is moving Morrisons too far upmarket, perhaps that’s unfair. Bringing the store environment on par or slightly ahead of its rivals is unlikely to send shoppers dashing down to Iceland or Aldi – as long as it goes hand in hand with a strong price message. No one will be scared of some nice lighting and a good range of fresh food.

Lynch believes that 2013 could be a crunch year for the retailer and that this time next year the numbers could tell a different story.

She says: “This expansion, coupled with improved marketing communication, should help Morrisons to reverse its fortunes in 2013 and realise the potential that its strategic direction offers.”

Philips will be keen to put his foot on the accelerator, drive performance in the crucial Christmas period and prevent an ugly crash into a profit warning in January. With a few tweaks and improvements, there’s every chance things will pick up.