A downbeat trading update from grocer Morrisons raised questions over prospects for other grocers and the retail industry more widely.

Morrisons storefront

Morrisons signalled that inflation and the war in Ukraine could hit performance

Morrisons, which was acquired by private equity giant CD&R in 2021, seemed to confirm that the clouds gathering for some time had formed into a thunderhead. Inflationary cost pressures have combined with the shock of war in the Ukraine to send consumers running for cover. 

Morrisons cautioned that inflation and “developments in the geopolitical environment since the beginning of February” were expected to “adversely impact the wider grocery market as well as our performance” and that it was impossible to tell how long such conditions would last. 

The upshot was “unless these conditions improve, the impact of these developments could have a material adverse effect on our sales and EBITDA for the year”.

While few in retail would dispute how tough trading conditions and costs have become, some would wonder whether some at least of Morrisons’ challenges are particular to it, following its £7bn takeover last year

Morrisons equipped to deal with current conditions

There is probably a bit of that at play. Although respected bosses David Potts and Trevor Strain stayed on after the takeover, such deals can often unsettle or distract people across the business. Questions over future financing arrangements, or about the possible sale of assets, can create uncertainty. 

A bit of that could be evident in Morrisons’ recent performance in market monitor Kantar’s data. The most recent study for the 12 weeks to March 20 showed Morrisons’ market share was down year-on-year, from 10.1% to 9.5%.

It’s worth noting though that Morrisons’ results - reflecting technicalities such as a change of year-end - were issued, it is understood, partly as a tidying up exercise and to provide transparency in the event, for instance, of debt refinancing.

Morrisons David Potts Terry Leahy

David Potts (left) and Sir Terry Leahy have traded through hard times before

Potts and Strain - and of course Morrisons chair, CD&R senior advisor and former Tesco legend Sir Terry Leahy - have traded through hard times before. They should be able to apply their combined decades of experience to the pressing issues of the moment. 

They have a few levers to pull that may well be to their advantage in the present inflationary circumstances, such as Morrisons’ position as one of the UK’s biggest food manufacturers. That vertically-integrated business model, seen by CD&R as one of the company’s greatest strengths, gives it some flexibility in addressing inflation.

The latest Kantar data also revealed that other grocers are finding the going tougher, indicating that Morrisons’ caution this week may end up being replicated at other big names. 

Supermarket sales slid 6.3% over the period. Tesco was the only one of the big four grocers to increase market share, while value player Aldi won a record share and counterpart Lidl equalled its best-ever previous performance as inflation rocketed.

Everyone gearing up for a tough 2022

Much of the evidence available so far points to the conclusion that many retailers have already come to - that this year is likely to be brutal, as they seek to balance the costs of doing business with the provision of value for money for customers, and the challenge made all the more difficult by the impacts of war in Europe.

Hard on the heels of Morrisons, Tesco’s full-year results next Wednesday (April 13), will bring a chance to gauge what the rest of the year may bring for the grocery sector - and beyond.

As a powerful player in general merchandise as well as food, and the biggest retailer, Tesco’s take on how customers are feeling and behaving now and in the months to come will be seized upon by the industry and investors. 

After a strong Christmas, Tesco reported expected retail operating profit to be  “slightly above” the top-end of its guidance of £2.5bn to £2.6bn.

The mood music then was happy, despite cost pressures and supply disruption. The extent of any change of tone next week will shape the mood and trading mindset across retail.

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