John Collingridge: There’s no need to hit the panic button over Morrisons

IF we were under any illusions about the pace of Britain’s recovery, Morrisons’ first quarterly sales slide in seven years brought us down to earth.

The Bradford-based chain is the sort of retailer which ought to be thriving in a recession, playing on its image of thrift and prudence. But after a hitherto good performance during the downturn, even it appears to be losing momentum.

The grocer reported a one per cent sales fall for the 13 weeks to the end of April, and some analysts suspect once the effect of inflation is stripped out, volumes may be four to five per cent down.

Hide Ad
Hide Ad

Battered by a bruising combination of higher fuel costs, big energy bills from the freezing winter, employment uncertainty and the Government’s austerity drive, customers are hesitating before loading their shopping trolleys.

Some are questioning chief executive Dalton Philips’ direction.

“It is losing share to Asda and not making hay whilst Tesco has been underperforming and so shipping share elsewhere,” said Shore Cap’s Clive Black, adding downgrades could be imminent.

“Furthermore, Morrisons still has virtually no access to the few areas of growth in the market; on-line... and convenience.”

Hide Ad
Hide Ad

But should we hit the panic button? The simple answer is no.

Philips was quick to point out the same quarter last year was exceptionally strong thanks to the royal wedding and warm Easter.

And he was steadfast on Morrisons’ decision not to discount heavily via vouchers – a tactic favoured by Tesco and Asda.

Instead he’s relying on its new M Savers value range. “We are prepared to sit back rather than pursue small market share gains at any cost,” said Philips.

Hide Ad
Hide Ad

Crucially, there was no mea culpa of the kind issued by Tesco’s Philip Clarke in April when the market leader warned over profits for the first time in 20 years.

Philips believes Morrisons has the right strategy for the toughest consumer climate for decades.

I’m inclined to agree. The sales dip seems more a reflection of the market than Morrisons losing its way.

Vouchers will win over fickle shoppers, but are a short-term fix. Customers notice when promotions get gradually less generous, and vote with their feet. Sustainable growth is more important.

Hide Ad
Hide Ad

Morrisons’ expansion of its fresh format emphasises the look, smell and quality of its goods. Meanwhile, the South remains a relatively untapped market for Morrisons, and more fresh food will appeal to affluent consumers. Convenience stores will attract the time-poor shopper, and it plans soon to have 20 outlets.

And while the internet expands retailers’ reach, Ocado’s struggles to deliver profits show the pitfalls of selling food online. Morrisons’ purchase of baby goods retailer Kiddicare gives it a toehold online, but keeps its options open.

At number four in the grocery market, Morrisons has much more to gain than its rivals stand to lose.

One of the lessons of the banking crisis must surely be that short-term profit maximisation has perilous consequences.

Perhaps we need a reminder?

Hide Ad
Hide Ad

It requires excessive risk-taking, which results in unwieldy books of commercial property loans and sub-prime mortgages, which leads to banks’ collapse, which threatens governments’ balance sheets and basically lands the global economy in a huge pickle.

So why are UK banks still so insistent on unsustainably high returns on equity (ROE)?

HSBC has ROE of 10.9 per cent and a target of 12 to 15 per cent. Barclays’ ROE is 7.9 per cent and it wants this to rise to 13 per cent. Lloyds is aiming for an ROE rate of 12.5 to 14.5 per cent.

National Australia Bank wants to drag ROE at Yorkshire and Clydesdale banks (excluding the £6.2bn rotten commercial property book) closer to its group rate of 15.2 per cent.

Hide Ad
Hide Ad

But that’s a big ask. Britain’s economy has been dire, whereas commodity-fuelled Australia never entered recession.

Can we realistically – or responsibly – expect mid-teens returns in an economy which retreated 0.2 per cent in the first quarter.

A recent study by the European Money and Finance Forum compared returns at European banks with member-owned lenders – co-operatives or mutuals.

It found the average pre-crisis ROE at European banks peaked at more than 14 per cent in 2006. This fell to minus 0.5 per cent in 2008. Mutuals, however, hit just 11 per cent ROE in 2006, but only fell to five per cent in 2008.

Hide Ad
Hide Ad

Shifting the risk profile of banks – even those exposed to emerging economies – closer to mutuals by lowering their ROE targets, would make for a safer banking system. It might not be popular with banks’ shareholders, but if it results in fewer global financial meltdowns, who cares?

Related topics: