Opinion: Potts' Morrisons plan is far from finished

Putting a brave face on what was a shocker of a first half – in which pre-tax profits nosedived 47% to £126m – Potts claimed customers and staff were already “beginning to notice improvements” just five months into his reign.

But the former Tesco executive admitted that the grocer faced “a long journey” to recovery and consequently wasted no time in mapping out his priorities for the business in a bid to address ailing sales.

Outlined as the central pillars of his transformation blueprint were: being more competitive on price and quality; serving customers better; finding local solutions in stores; developing popular and useful services; simplifying and speeding up the organisation, and making its core supermarkets strong again.

The City, though, remained unconvinced. Shares in Morrisons closed 2.8% down at 170.9p in the wake of the gloomy update.

Two years of change

What a difference the intervening 24 months have made.

Compared to the sombre mood at the Royal Bank of Scotland in Bishopsgate in September 2015, the atmosphere at today’s press conference was palpably different.

In contrast to the nervous, almost uncomfortable presentations given from behind the comfort of a lectern in the early months of his reign, Potts this morning cut a chirpy, confident figure as he spoke to journalists in the more open setting of a round table format.

He waxed lyrical about the grocer’s burgeoning wholesale business, the impact of its ‘Fresh Look’ store refurbishment programme on supermarket sales and the upticks in availability and stock levels that have been driven by its new automated ordering system.

He spoke bullishly about Morrisons’ ability to fend off food price inflation and the ongoing onslaught of the discounters.

He was even buoyant enough to crack the odd one-liner.

And well might Potts feel within his rights to do so.

From the depths of that profit collapse just two years ago, Morrisons today reported a 39.9% surge in pre-tax profit to £200m, hailed a seventh consecutive quarter of improving like-for-likes and revealed that wholesale revenues would exceed £700m by the end of the year.

Leveraging its strengths

Potts has no doubt kept a watchful eye on its competitors – notably the Tesco recovery and Sainsbury’s acquisition of Argos – but not allowed himself to be distracted by their growth plans.

He has, quite brilliantly, stuck to what Morrisons does best, leveraging its vertically integrated model both to grow a wholesale business and ramp up its Market Street offer in stores.

Its Best premium own label range has been reintroduced to good effect – particularly impressing around seasonal events – and the expansion of its Nutmeg clothing proposition has given another reason for shoppers to visit its supermarkets.

As broker Jefferies points out, such a “successful reinvigoration” of its retail offer has “insulated Morrisons from wider consumer and competitive headwinds”.

Okay, its like-for-like momentum may have slowed in the second quarter, but the 2.1% uplift still represents growth on growth – like-for-likes were up 2% in the comparable period last year.

In today’s ultra-competitive market, that’s not to be sniffed at.

Room for growth

Potts remains realistic, though. He refuses to call the end of the “fix” chapter in his three-phase turnaround, but says the “rebuild” and “grow” stages are now running “concurrently” as Morrisons pursues capital-light methods of growth.

House broker Shore Capital delivers a similar message. “There remains much still to do,” its head of research Clive Black suggests.

Morrisons aims to have given 80 stores a ‘Fresh Look’ by the end of the financial year, an acceleration from the circa 25 that were refurbished during its first half.

Its automated ordering system is still being rolled out and will improve availability across even more stores as it is introduced.

The grocer’s partnership with Rontec continues to grow, supplying 33 of its petrol forecourts and predicting to hit 50 by the year end, while it is also upgrading its fully owned and operated petrol forecourt sites.

And Morrisons’ supply deals with Amazon and McColl’s have created a solid foundation from which to build its wholesale arm, as Potts revealed it is “open for business” with other retailers.

With much headroom still to grow into, Potts’ plan to pump up profits is far from finished.