ONCE on a trip to Texas I asked a senior executive of one of America’s largest retailers, think big..., which grocers they felt were the best in the world. He replied that there were two stand out contestants for such a title in his view; America’s HE Butt and Yorkshire’s Wm. Morrison Supermarkets.
Under the stewardship of Sir Ken Morrison, Morrisons became a potent force in British “supermarketing”. It was a business of scrupulously high standards. Its stores had the best availability in the market, despite paper-based replenishment. The business’s counters were market leading. The vertical integration stood Morrisons apart, helping to make its fresh produce the best value in the market and the most distinctively merchandised, while it had the greatest density of grocery and household brands.
From a company perspective, Morrisons was also exceptionally strong, owning everything that moved, with cash on the balance sheet to boot. To complete this somewhat distinctive, quirky, slightly rebellious but usually right investment proposition, Morrisons had no non-executive directors and yet the greatest following by investors for any supermarket quoted on the London Stock Exchange.
Morrisons hit these dizzy heights in the early years of the new millennium. More than a decade on, the business has re-based its profits, is embroiled in what has the look of a real industry price war, rather than the skirmishes often plastered over the front pages of the tabloids, and its stock value has crumbled. So what went wrong?
Two factors are at the heart of our thinking with respect to this question. Perhaps the key decision explaining Morrisons change in fortunes was the decision to acquire Safeway.
We still do not understand why Morrisons felt that it needed to acquire all of Safeway, as opposed to the best bits. At the time we doubt that Morrisons’ competitors would have been allowed by the regulator to buy many of its stores, leaving Morrisons with a pretty clear menu from which to choose.
However, we believe Morrison was badly advised, and ultimately bit off more than it could chew.
Indeed, Safeway arguably subsumed Morrison, leading to enormous distraction and a change of culture at a board level from which we do not believe that it has recovered.
With choppy trading waters, the City demanded change and new management and processes were brought in. Arguably box ticking and process extinguished the creative and cultural brilliance that made this business such a wonderful force.
Alongside this pressure the reality too is that Morrison’s great leader, Sir Ken, who alongside Lord John Sainsbury, is the greatest mass-market grocer that Britain has ever known (we regard Sir Terry Leahy simply as a great businessman) started to reach an age when the baton had to be passed on. That executive baton was first placed in the hands of Marc Bolland, who went on to lead Marks & Spencer, and then Dalton Philips. The passage of time has been the second key change influencing Morrisons fortunes; this brilliant grocer was impossible to replace.
Under Mr. Bolland, Morrisons went through a very effective re-branding, modernising the face of a business that was now national. The process was taken a step forward by Mr Philips through his “Fresh Format” proposition, which started to evolve at Kirkstall Road in Leeds and then was launched in full in St Albans. We felt it was taking Morrisons down a route that may not have been the right one and at too fast a pace. In particular we worried that Morrisons may lose some of the empathy it had with its core customers, while not necessarily attracting new ones.
Our worst fears were effectively confirmed by first of all a slowdown in trade and then the entry to a sustained period of market underperformance.
Management suggested that the under-performance was down to a lack of presence in the growing convenience and online channels. The reality is that Morrison was losing what we call core customers to the discounters.
Necessity has forced a new approach, which management announced in March 2014. Surprise, surprise, prices are to be cut, promotions eased and costs reduced. The impact upon the group’s profitability is swingeing; we have cut our 2015 profit expectation for Morrison from over £1bn to £325m.
While penal, we actually welcome this new approach believing it to be long overdue but the right course for Morrison’s to re-engage with its shoppers. The shoppers of Yorkshire should be winners in this respect, whether the shareholders will do remains to be seen. Morrisons is a business with tremendous heritage. A closer relationship to the past may yet make for a brighter future.
• Dr Clive Black is head of research at Shore Capital Stockbrokers.