Morrisons Group’s swift turn around

Feb 20 2008 by Aaron Boland, Liverpool Daily Post

TWO years ago, supermarket chain Morrisons saw its share price tumble to 165p as the then-troubled group racked up the first loss in its 106-year history, and wrestled with the costs of the acquisition of Safeway.

The raft of problems encountered during the takeover led to veteran Sir Ken Morrison stepping down as day-to-day boss of the former family business, making way for the polished ex-Heineken executive Marc Bolland.

Today the share price has almost doubled and last night stood at 306p, showing just how much the company has been transformed. It delivered a set of market-beating results to become the success story of the Christmas shopping season.

Helped by a cheerful promotion drive with celebrities Lulu and Alan Hansen, it has enjoyed double the growth of its biggest competitors Tesco and Sainsbury’s in recent months, gaining market share at their expense.

Analysts are applauding its performance, but warning that continued growth cannot be taken for granted in such a competitive market and at a time of consumer downturn.

Bradford-based Morrisons, which is the UK’s fourth largest supermarket chain, is planning a £450m store overhaul and hopes the investment will help it make further inroads into the estimated £120bn grocery market.

The latest research estimate gives the group an 11.5% market share, up from 11% a year ago, and coming mainly at the expense of Tesco and Sainsbury’s.

Food analyst Darren Shirley, from Shore Capital, said the firm’s recovery was well under way, but warned the market needed to see “growth on growth” from the retailer, and an outline of its long-term strategy, before its winning status could be cemented.

He said Morrisons lacked the international dimension of market leader Tesco, and bigger product lines of Sainsbury’s and Asda.

He said: “Morrison’s has clearly benefited from finally having centralised its operations since the takeover.

“But whether they can maintain their performance and produce good growth on growth remains to be seen.

“The space available for food in the UK is becoming ever more limited, and as we go towards 2011, we see the increases in growth potential becoming constrained.”

Analyst Philip Dorgan, at Panmure Gordon, said: “First, the food retailing sector is not defensive in a consumer downturn, despite the blithe assumption that it is.

“Second, Morrisons current share price is assuming it can beat industry-leading margins by a country mile.

“We think the industry is set to become much more competitive, and that this will make margin expansion difficult as the fight for market share intensifies.”

ANDREW WADE, retail analyst at Seymour Pierce, said Morrisons could expect competition from its bigger rivals to intensify in the next few months.

He said: “I think the other guys are going to come back.

“But there are a lot of positives still there.

“Morrisons has been doing well recently on a whole range of things: the refreshing of the stores, new product lines, advertising.

“We have got the stock as an out-perform, as there are a lot of positives still to work their way through.”

Morrisons was focused on the north of England before it bought the struggling Safeway business in 2004 for £3.3bn, and became a national player with nearly 500 stores.

Integrating the two businesses proved a struggle. Morrisons posted a £312.9m pre-tax loss for the 2005/2006 financial year after spending hundreds of millions of pounds on store conversions.

But new shops – featuring the “Market Street” grocery area – immediately started reaping the benefits, with sales enjoying double figure percentage rises.

Morrisons went on to post a series of better than expected trading updates, with pre-tax profits for the half year to July 29 reaching £266.3m, nearly double the £134.2m for the year before.

This Christmas, the group emerged as the winner among the UK’s “big four” supermarkets after seeing like-for-like sales excluding petrol soar 9.5% in the six weeks to January 6, well above the 7% expected by analysts.

Pre-tax profits for the year to February 3 are expected to come in around £524m, compared with £369m the year before.

alistairhoughton