Nick Bubb's Verdict: Is Morrisons getting the balance right?

Has Morrisons chief executive Dalton Philips struck the right balance between short-term tactical moves and long-term strategic investments?

With pre-tax profits of £868m in the last year, Morrisons is still highly profitable (and its 5.3% operating margin is still to be envied), but the stockmarket is a hard task-master, because the direction of travel is downwards.

On a 52-week basis, profits were 8% down in the year to the end of January, which is a long way short of what the board expected this time last year, even though big operating cost savings were delivered. Given the worryingly weak like-for-like sales trend and the soggy share price, boss Dalton Philips is under some pressure to turn things around.

Today’s final results announcement brought good news and bad news on the like-for-like sales front. The bad news was that fourth-quarter sales got even worse, with the 4.1% overall like-for-like sales decline implying a near 6% fall in the core, uninvested stores. Even though Morrisons took its foot off the marketing pedal a little in January, to prepare for the big relaunch in February, that is still a bit shocking. The good news is that Morrisons hit the ground running in February and there is a better feel to the start to 2013’s trading, as highlighted by the encouraging Nielsen grocery sales data for the four weeks to March 2.

Dalton Philips has said that Morrisons big problem has been in the effectiveness of its promotions and communication with the consumer, so the more punchy “Pick of the Street” fresh food promotions and the “Payday Bonus” coupons, when coupled with the Ant and Dec TV ads, seem to have helped give the business an edge again. And the recent horse meat scandal has been a blessing in disguise, helping Morrisons to focus the consumer on the importance of food provenance and its own in-store fresh food credentials. The result has been a big improvement in consumer perceptions of the brand in recent weeks, which has done wonders for morale within the business.

Yet the headwinds for Morrisons from the flat economy and the inexorable growth of Aldi are still formidable, while the likes of Tesco, Asda and Sainsbury’s are still battling hard for market share as well. The sobering message is still that the City should expect another year of modest like-for-like sales decline overall (-1%), despite the uplifts being seen in the revamped Fresh Format stores.

And it is an uncomfortable truth that about 40% of the growth in the grocery market is coming in convenience stores and in online shopping, markets where Morrisons is barely represented.

Playing catch-up is never easy and Morrisons can ill afford to plough too much into jumping on the convenience stores and online grocery retailing bandwagon because of the underlying profit pressures on the business. As it is, so-called start-up costs will more than double, from £17m to £40m, in the current year.

At least Morrisons has established a decent pipeline of new convenience stores, although the boast that it will soon be opening as many per week as Sainsbury’s rings rather hollow, given Sainsbury’s much much higher starting base.

What exactly Morrisons will do to catch up in online grocery in early 2014 is unclear, despite the confirmation of technology know-how talks with Ocado and the rumours of a dark store approach, because management, unfortunately, refused to enlighten the City today. It has promised that it will be different and that it will be profitable, and that it has learnt a lot from the Fresh Direct business in New York, so it will be disappointing if it muffs the opportunity.

Morrisons just about got the balance right today, in terms of its response to the short-term and long-term pressures on the business, but the clock is ticking. The stockmarket is braced for another year of profits decline this year, with PBT unlikely to be much above £800m in 2013/14, after start-up costs. But those start-up costs could escalate further in 2014/15, as the online grocery launch rolls out. A further profit decline in 2014/15 must be avoided.

Dalton Philips will keep the wolf from the door if the new M Local stores soon start to make some money, if he can come up with a convincing online grocery plan (with his IT guru Scott Weavers-Wright) and if the consumer remains interested in food provenance. Failure or weakness in any of these areas will be judged harshly by the City.