Ros Snowdon
Deputy City Editor
TROUBLED supermarket chain Morrisons revealed a £313m annual loss yesterday, but declared the worst was behind it as it announced a three-year recovery programme.
The Bradford-based company has found the £3bn takeover of Safeway a far more difficult task than first thought, but there were signs yesterday that the group has learned from its mistakes.
"It would be an understatement to say this has been a challenging year," said chairman Sir Ken Morrison.
"But the business has stabilised and we are confident that the worst is over. Sales figures over the past seven weeks have been more encouraging."
In the seven weeks to March 19 underlying sales rose by 3.2 per cent, an improvement on the 2.4 per cent increase in the year to January 29 and a stronger performance than over the Christmas period when sales rose by 2.8 per cent.
Yesterday finance director Richard Pennycook unveiled a three year Optimisation Plan to improve profits and restore pride at Morrisons.
"People – from store managers to finance guys – have been distracted for the past two years following the acquisition," he said. "Morrisons was under-resourced to handle it, but we will now build on our strengths and go back to the day job."
He added that the company's confidence had taken a knock, but management was determined to restore the group's credibility.
The Optimisation Plan aims to eliminate £30m from central costs and £30m from its distribution network this year.
It will also save six million "staff hours" in stores which will produce annualised savings of around £90m.
This will be done through natural wastage rather than further job losses. The group recently announced 2,500 job losses following the closure of three depots in Aylesford, Bristol and Warrington.
It also vowed to strengthen margins; the aim is to add 90 basis points to the gross margin in three years.
Much of the benefits of the programme will be ploughed back into the business in terms of lower prices so the group can compete with its three bigger rivals Tesco, Sainsbury and Asda. Following a successful pilot Morrisons is to introduce a bigger range of health and beauty products.
Costs arising from the merger were nearly £375m in 2005/06.
Underlying pre-tax profits for the year to January 29 were just a fifth of what they had been – £61.5m compared to £332.2m the previous year. This was at the lower end of the £50m to £150m guidance that Morrisons gave in a profits warning last June.
Much of Morrisons' future success depends on who is chosen to replace chief executive Bob Stott, who announced plans last year to step down as soon as a replacement could be found.
There have been rumours that Sir Ken wants to appoint another insider, but the City is demanding that fresh blood is brought in.
Sir Ken said that good progress was being made by headhunters Egon Zehnder. "We have a list, yes it's a shortish one and we certainly hope to announce Bob's replacement soon," said Sir Ken. He added that the group hopes to make an announcement by the AGM on May 25.
Sir Ken wants someone with a good sales background.
Morrisons' shares closed the day down 12.5p, a fall of six per cent to 197p.5.
ros.snowdon@ypn.co.uk

Changed firm looks to future
comment
AT the Morrisons Press conference in London yesterday, the group's top three directors – Sir Ken, Bob Stott and Richard Pennycook – were asked what would happen if margins failed to improve this year.
Mr Pennycook calmly replied that if that happened, none of them would be sitting there this time next year.
This is Make or Break time for Morrisons. It's the group's last chance. The three-year turnaround programme has to work.
Two years ago Sir Ken walked tall as one of the most revered retailers in Britain. Every year he had another set of record profits.
But the Safeway takeover changed that. The group was ill-prepared and far too inexperienced to successfully merge the Safeway and Morrisons brands. It was also too arrogant to realise this and failed to bring in outsiders despite enormous pressure from the City and non-executive directors.
The word in Bradford is that Sir Ken is now ready to step down, but he wants to go out with his head held high. That will probably mean hanging in there for a couple more years by which time he believes the group will be back on track.
It is gratifying to see that Morrisons appears to have learned from its mistakes. Yesterday the group admitted that it has made quick decisions based on instinct, but now instinct is not enough. Analysis and support is also needed.
At heart Morrisons is still a good operator and now the integration is complete it can concentrate at what it's good at.
The big question now is who will be brought in to replace Bob Stott as chief executive? There have been rumours that Sir Ken wants managing director Marie Melnyk, who has worked at Morrisons all her career.
But this is highly unlikely. The City wants an outsider and perhaps the shortlist contains some non-food retailers?
Whoever does take the job will have more on their plate than simply returning Morrisons to its former glory.
The goalposts have changed over the past few years and the supermarket sector is more competitive than ever.
Morrisons' new chief executive will have their work cut out, but don't underestimate Sir Ken. He intends to walk out in two years' time with his head held high and his reputation intact.

Time of trial for supermarket chain
September 2002 – Morrisons announces bumper results. Underlying sales rise six per cent, beating Tesco which only managed a four per cent rise.
January 2003 – Morrisons launches a multi-billion pound bid for Safeway. The offer is soon eclipsed as five other rivals enter the fray including Tesco, Sainsbury and Asda.
March 2003 – The Government refers all the bids to the Competition Commission
December 2003 – Morrisons bid for Safeway is cleared, but the other three supermarkets are told they cannot bid. Morrisons secures the backing of the Safeway board for a £2.9bn takeover.
January 2004 – Morrisons says underlying Christmas sales fall more than four per cent. Rivals' results much better.
May 2004 – Morrisons gives in to City pressure and appoints two non-executive directors, David Jones of Next and Duncan Davidson of Persimmon.
July 2004 – Morrisons announces its first-ever profits warning and says that the task of turning Safeway around is proving harder than expected.
March 2005 – Morrisons announces second profits warning and blames problems with integrating Safeway's accounting systems. Later in March it issues a third profits warning and says it will report lower sales and margins.
May 2005 – Fourth profit warning. The company blames the dual costs of administration and IT functions
June 2005 – Fifth profits warning, analysts say the situation is out of control. Sir Ken appoints another three non-executives.
September 2005 – Strike threat by distribution workers fades as Morrisons gives in.
October 2005 – Chief executive Bob Stott announces plans to step down. Morrisons announces the first loss in its 106 year history.
March 2006 – Announces full-year's loss of £313m.