Morrisons expects Christmas surge despite tough conditions

The Bradford-based group, whose new chief executive Dalton Philips is to trial convenience stores and internet shopping next year, met City forecasts yesterday with a 1.3 per cent rise in third-quarter underlying sales.

Morrisons' finance director Richard Pennycook described it as a solid performance in a difficult consumer environment.

"Consumer pressures are showing no signs of easing," he said. "The VAT increase is eight weeks away. But we remain confident we can trade hard and well in a low growth market."

The group is expecting the usual Christmas boost as consumers put aside money worries in order to give their families a good Christmas, but predicts belts will be tightened again in the New Year.

"Customers will have a good Christmas, it's important to them. Then we expect to see a back to value focus in the New Year," said Mr Pennycook.

Morrisons, the UK's fourth-biggest grocer behind Tesco, Asda and Sainsbury's, played down fears of a surge in food prices, saying it does not see big inflationary pressures. Shoppers are offsetting the impact of rising prices by buying more goods on promotion.

Mr Pennycook said that despite a 60 per cent increase in wheat prices, its bread prices are at five-year lows.

"We are protecting our customers from the worst of the commodity pressures," he said. "We are focusing hard on value, promotions and deals to help customers save money."

The 1.3 per cent increase in like-for-like sales was up from one per cent in the previous quarter, helped by a small increase in food prices.

Morrisons is confident that its collector card loyalty scheme, which has helped to drive strong Christmas sales growth in recent years, will boost sales this year. The scheme is to be extended through Christmas and into January to help customers cope with the rise in VAT and other household spending pressures.

Analysts expect Morrisons to make full year profits of around 860m.

Seymour Pierce analyst Kate Calvert said: "These numbers highlight that while inflation is coming through for the industry, volume growth remains lacklustre and we expect this situation to continue into 2011 given the consumer headwinds of rising taxation and public sector job insecurity.

"Morrisons has gone through a period of super-normal catch-up growth post the integration of Safeway and we believe it is returning to more normalised industry average growth rate."

Total sales in the third quarter rose by 2.8 per cent and ahead by 4.7 per cent when including petrol forecourt sales.

The group's shares closed down almost 4 per cent last night, a fall of 11.30p to 278.70p.

Analyst Sam Hart at Charles Stanley said: "We expect trading conditions in UK food retail to remain tough, with the competitive environment staying intense but rational and the consumer under pressure from Government austerity related measures and falling real incomes. Ultimately, however, we anticipate that demand will hold up relatively well in 2011, given the non-discretionary nature of a high proportion of sales, our belief that unemployment is somewhere close to the peak and expectation that interest rates will remain at historic lows until 2012."

He added that in such an environment, he thinks Morrisons can continue to make steady progress.

Morrisons has beaten sales growth at bigger rivals Tesco, Asda and Sainsbury's in recent years as it recovered from the difficult acquisition of Safeway in 2004 and customers responded to its mix of low prices, fresh food counters and innovative promotions.

But it has recently slipped behind Sainsbury's following a trend towards affordable luxury foods, which has favoured more upmarket players.

Morrisons is hoping to diversify under new chief executive Dalton Philips, who is to trial convenience stores and selling over the internet next year.

The group will trial three smaller shops next year as Mr Philips explores new ways to expand the company.

The stores will be under 3,000 sq ft and while they will be too small to offer Morrisons' in-house bakers, butchers and fishmongers, fresh produce will be the driver.

The group is keen to make the most of its unique position as a major food producer as well as a retailer.

It will also carry out a limited internet trial in one area of the country, which will only be rolled out if it proves profitable.

Peacocks proves to be strutting

Morrisons reported good progress yesterday at its first Peacocks concession shop within its Idle store in Bradford.

The supermarket chain said customers have reacted well to the Peacocks store, but it is still early days and no decision has been made on whether to roll out the concept to other stores.

Morrisons has described the concession as an "individual opportunity" made possible by the refurbishment of the store, but analysts believe Morrisons will roll it out across the country if it proves successful.