Morrisons delivered a strong performance in its third-quarter results this week, while Tesco reported its lowest sales growth in 15 years.

Will Morrisons' value and fresh credentials win out, or will it have to expand into non-food to remain on top?

Morrisons' reported its barnstorming results just two days after the mighty Tesco reported its lowest sales growth in 15 years. Morrisons' results will have led to some anxious executives at Tesco House in Cheshunt, but should the UK's biggest grocer raise more than an eyebrow?

Morrisons' performance is well ahead of the industry average and demonstrates that initiatives in range, shopfit, branding and marketing are working. Chief executive Marc Bolland also said that 4.4 per cent of the 8.1 per cent like-for-like sales jump has come from growth in customer numbers, up by 700,000 since the second phase of the optimisation plan in the third quarter last year.

Morrisons is winning customers. It has strong value credentials and its price-cutting deals over the past few weeks have stood out among the big four grocers. It coined the term Price Crunch, which has given weight to every promotion it has launched since. Its Meal Deal for£4, for example, offered customers a meal for four for£1 per person. In this climate, that's a hard deal to beat.

This value message has meant that Morrisons has so far been unaffected by the hard discount grocers such as Aldi and Lidl. And as customers trade down from the likes of Sainsbury's and Waitrose, Bolland believes they are impressed by Morrisons' Market Street concept. He says the quality of the fresh fish and meat on offer through Market Street will mean those customers stay with Morrisons, while the irresistible price promotions will satisfy shoppers with less money in their pockets.

Toughening conditions

But Bolland and his team admit that the climate is tough. The real test for Morrisons will be how it responds to a significant toughening in growth comparisons in the fourth quarter. It revealed this week it is purchasing 38 smaller supermarkets from the Co-op and the freehold for its distribution centre in Kent. Both investments will affect profit next year.

The outlook is also challenging for food. Perhaps over harshly, broker Panmure has cut its food retail forecasts for 2009/10 by 13 per cent. It argues that people still have to eat, but there is a lot of choice of where they can shop and if the economic climate remains tough, they will trade down.

As the recession bites and high food price inflation annualises, this will drive margin declines. And as we all know, the low margin structure of food retailers means that their economics can change dramatically as a result of relatively small changes.

The strong retailers will survive but perhaps it is those grocers, such as Tesco, that have their fingers in the non-food pie as well as food, that will come out stronger. Morrisons will update the City on its non-food plans in March and by then, we may be looking for a stronger emphasis on this sector for Morrisons to remain at the top of its game.