Morrisons’ chief executive is sure the grocer’s biggest opportunities still lie ahead, he tells Alex Lawson.

Philips is revamping more stores this year

Morrisons chief executive Dalton Philips is a man creating a new business model, and observers are fascinated to see where, and how fast, he is taking the grocer.

The Irishman gave onlookers a peek under the skirt of his long-term vision last week, when Morrisons reported a full-year pre-tax profit rise to £947m from £874m and a like-for-like advance of 1.8%.

But beyond that, he sketched out his plans for the grocer to become a true “multichannel, multi-format” business, although analysts have called for more detailed plans. 

Whether Morrisons’ role as the a tortoise to its rivals’ hare in online grocery and convenience proves to be an advantage remains to be seen. But Philips is clear: Morrisons is taking a cautious approach by testing things and considering new moves, and will not be drawn into risky decisions.

“We want to focus on doing a few things really well, rather than many half-heartedly. We are grounded in our convictions. When we deliver against every initiative we will be a better business than ever,” he maintains.

By 2016, Philips forecasts, the grocer will have taken the founding principles of Sir Ken Morrison – quality, affordable food alongside strong service values – to create a well-rounded operation that is available in the home online, locally and at reasonably sized out-of-town stores.

It is the final point that is perhaps the most intriguing short-term. Philips launched a surprise attack on hypermarkets, which he declared dead. That is in contrast to his counterpart at Tesco, Phil Clarke, who has acknowledged the growing importance of online, but insists that giant stores are “not beached whales”.

Philips argues: “There is no need for soulless sheds. Shoppers want skilled people on hand. The future of general merchandise is not big box, it’s to be delivered in a cardboard box. Hypermarkets will be a blip in the history of retail.”

He offered a bleak vision of the future to rivals Tesco and Asda: “You will be left with 100,000 sq ft stores, scratching your head saying ‘what do we do with these?’”

Philips believes that Morrisons’ optimum store size is 38,000 sq ft containing at least 30% fresh food and selected general merchandise lines which consumers have an “emotional engagement” with, such as children’s products.

Morrisons

Morrisons

Morrisons is due to launch a transactional non-food website later this year. Its website “is one of the most visited in the UK”, finance boss Richard Pennycook says. 

While Philips is confident about online prospects for general merchandise, he is more circumspect about selling food online. Despite investing significant capital into learning how to create a transactional food website from Fresh Direct in a competitive New York market, Philips is ready to walk away from food retail via the internet if the correct model cannot be found.

“If we cannot do it in a compelling and profitable manner, we will not do it at all,” he says. “I do not think you should subsidise online customers by charging your core customers more,” he explains.

Long-term, the retailer’s decision on online grocery – due towards the end of this financial year – could prove a key moment in its history.

A convenient truth

Although Philips clearly harbours some doubts about the opportunities for online food retail, Morrisons is likely to step on the gas in another field where it has lagged competitors – c-stores.

The handful of M Local shops are considered impressive. An emphasis on fresh food, competitive pricing and the food-to go have grabbed attention.

The grocer intends to open 20 more M Local stores this year and another 50 next year. The target is understood to be around 300 in the next three years. Questions remain, however, over the capacity of its “hub and spoke” model, which means a mother supermarket store supplies local convenience shops.

But Philips tells Retail Week this is not an immediate concern: “In Manchester, we have two coming out of the Cheadle Hulme store and can probably go up to four. You can have quite a few c-stores before you say the model does not work.”

Some observers would like to see faster progress in convenience. Oriel analyst Jonathan Pritchard says: “While in certain ways management’s conservatism is to be applauded, it could be about to miss a major growth opportunity with its inertia on convenience.”

While the convenience stores are drawing attention, it is Morrisons’ supermarkets which will provide the bulk of growth.

Getting the roll-out right of its Stores of the Future – now named Fresh Formats – will be key. Morrisons plans to revamp a further 36 stores on top of the 12 it has reworked already, devoting increased space to fresh food, stripped back counters to allow customers to see food production and improved ranges.

But if that doesn’t represent the bulk of its 475-store chain it could remain immaterial in terms of long-term impact on group performance. Moreover, it may have shown its hand in time for rivals Tesco, Asda and Sainsbury’s to respond.

Shore Capital analyst Clive Black asks: “Has Morrison perhaps spent too much time perfecting its approach rather than engaging in implementation, so allowing the competition to gauge how to respond while the consumer economy remains firmly unhelpful?”

But Philips counters: “We have developed a killer concept. The aim of businesses is to position yourself where it is difficult to be copied.”

Liberation front

Morrisons plans to free 10% existing store space in its 20,000 sq ft to 40,000 sq ft stores, creating a further 750,000 sq ft of retail space, equivalent to approximately a full year’s new store openings as part of Project Liberate.

The grocer has been paring down product ranges – for example reducing the number of sardine lines from 13 to eight and four bays to three – to present a clearer range to consumers and sell new products in their stead.

former Peacocks managing director Tim Bettley joins Morrisons as its first commercial director

former Peacocks managing director Tim Bettley joins Morrisons as its first commercial director

There has been speculation about what Morrisons will put in its ‘liberated’ space. Last week yielded the first indication, as Retail Week revealed that former Peacocksmanaging director Tim Bettley will join the grocer next month as its first commercial director for clothing.

The grocer insists Bettley has been brought in to expand its Peacocks concessions and supply of kids clothing in stores. But, given he has managed a 600-store retailer, Bettley appears well placed to expand Morrisons into own- brand clothing should it so wish. The grocer has admitted it “lags behind” with its private-label offer.

Philips says: “Customers expect to see some clothing in the supermarket today, especially kids clothing, which is a staple. We have a great partnership with Peacocks, we will keep looking at it and do the best for our customers.”

There has been focus, too, on the retailer’s M Savers and M Kitchen ranges, as well as the 8,000 products For Morrisons mid-market range due over the next two years, and these are perhaps more important.

Standards issues

Despite the opportunities which Philips sees in his stores, some staff have told Retail Week standards are slipping in some shops. “Go into a store on a Saturday afternoon and the shelves are empty and the queue management system has told staff to stay on the tills rather than fill up the shelves,” one store manager claims.

But Philips insists such issues are isolated: “We have 11.5 million customers, 475 stores – this is a very complex business. If that’s going on then we need to deal with it. The metrics show our customer service levels are high.”

Morrisons has also been addressing its supply chain, where it has taken the chance to make savings. The grocer has been pushing hard, using tactics such as e-auctions, to save on goods and services not for resale, such as printing costs. It aims to save £100m by 2013/14 through this strategy.

The grocer is also three years down the track in a six-year overhaul of its systems, bringing improvements to its distribution and supply chain.

Morrisons has made a number of acquisitions recently including a seafood processing factory in Grimsby, Vion UK’s meat processing factory in Cheshire and wholesale florist Flower World to further vertically integrate its supply chain and save costs. In light of its purchase of Kiddicare and stake in Fresh Direct, Morrisons is clearly not afraid to invest when the gains are clear.

“Even though this is initially a costly way to do it, Richard Pennycook obviously trusts Philips’ judgment on the numbers and I rate him very highly,” Evolution Securities analyst Dave McCarthy says. 

Overall, competition remains tough in food retail. Asda is in buoyant mood claiming it “won Christmas”, Sainsbury’s is performing solidly thanks to strong consumer campaigns and its Brand Match technology and Tesco is investing in revamping its stores.

For Morrisons, coupons remain a key differentiator and bosses believe it found an edge through “promotions that customers understood”. The retailer combines vouchers with its Great British Price Crunch campaign prices and Fuel Britannia to relieve squeezed consumer budgets.

From a consumer perspective, Morrisons has observed an increase in the number of till receipts at round numbers – £10, £20, £30 – showing that customers are shopping to exact budgets. Philips believes there is unlikely to be any let-up in pressure on household budgets in 2012 and Pennycook called on Chancellor George Osborne to reconsider the planned increase in fuel tax.

As competition intensifies, Shore Capital analyst Clive Black fears Morrisons has “failed to make hay while the sun has not shone” at Tesco, but Philips retorts: “We have made plenty of hay.”

He believes all areas of his business are working well and the grocer is on track to reach the 6 million households who do not already have access to a Morrisons store.

Philips concludes: “We have got momentum. We are making great progress to be different and better than ever. We are focused on sustaining our momentum and working harder than ever.

“We are building for tomorrow, and building to make sustainable and profitable growth. We have a massive opportunity to do something really, really special.”

While competition in grocery will remain ferocious, Philips obviously thinks the model he is developing is the right one to ensure Morrisons’ ongoing success.

Future growth

Morrisons has been unafraid to invest with acquisitions such as Kiddicare

Morrisons has been unafraid to invest with acquisitions such as Kiddicare

Plans

  • Convenience 20 M-Locals this year, 50 next year
  • Non-food website Will launch late 2012
  • Fresh Formats roll-out 36 more revamps this year
  • New space it will open 2.5 million sq ft of new space by January 2014
  • Online grocery More details at end of 2012/13
  • Social media Twitter followers up 160% in past year