Morrisons has struck a “ground-breaking” deal with McColl’s to supply products to more than 1,350 of its convenience stores and newsagents.
The agreement, which entails bringing the Safeway brand back to UK high streets, is expected to generate annual wholesale revenues of £700m for Morrisons.
Here’s how the City, and other retail watchers, reacted.
Clive Black, head of research at Shore Capital – Morrisons’ house broker
Wholesaling now forms a key part of David Potts’ strategy to broaden the business.
We see this as an excellent development, which sweats existing assets and further bolsters the growth, the cash flows and returns of Morrisons.
The supply agreement with McColl’s comes as the wholesale grocery segment in the UK goes through a near revolution, the most notable spark perhaps being the proposed merger between Tesco & Booker, plus wider speculation of Sainsbury’s interest in acquiring Nisa, which has not been confirmed by either party.
“With the McColl’s announcement we see quite a notable re-introduction of the Safeway label into 1,300 stores and 350 newsagents in time, with McColl’s gaining access to a one-year period of exclusivity for the brand”
Quite how matters pan out with respect to all of the above in the UK wholesale scene remains to be seen. However, we see the Morrisons-McColl’s supply agreement as a rather more simple commercial arrangement and so likely to be outside the remit of the CMA given that there is no acquisition or merger involved.
With the McColl’s announcement we see quite a notable re-introduction of the Safeway label into 1,300 stores and 350 newsagents in time, with McColl’s gaining access to a one-year period of exclusivity for the brand.
We welcome the exclusivity arrangement as it allows Morrisons good time to focus on its new wholesale client, but it also displays a wider ambition for the brand to perhaps be present in other outlets in time.
The group has been transformed under Mr Potts’ leadership in little over two years, but the journey does not feel anywhere near over yet.
Makes sense & with the shake up of UK grocery supply businesses, we anticipate further changes to the structure of the marketplace too!— Savvy Marketing (@savvythinking) August 1, 2017
GlobalData senior analyst Molly Johnson-Jones
Morrisons’ announcement on its plans to supply McColl’s convenience stores and newsagents signals a firm commitment to move back into the convenience market.
MLocal stores were sold in 2015, after a failed effort to participate in the growing convenience market, but this clearly has not put it off.
With Tesco and Sainsbury’s experiencing the benefits of being convenience players, it makes sense for Morrisons to be reviving the Safeway brand with a view to supply independents.
“After a successful trial with EuroGarages was revealed in the company’s preliminary results in May, Morrisons’ potential to create a side brand with Safeway could provide further growth in a highly competitive, and cost pressured, sector”
After a successful trial with EuroGarages was revealed in the company’s preliminary results in May, Morrisons’ potential to create a side brand with Safeway could provide further growth in a highly competitive, and cost pressured, sector.
It would make the most of operational leverage within the supply chain, given that its vertically integrated supply chain is not operating at full capacity, and producing more products would only incur small fixed cost increases.
The venture would also give Morrisons access to the high-growth food-on-the-go market, which it currently does not have the geographical scope to take advantage of.
In addition, it is a high-return, low-investment opportunity that would improve brand visibility and allow further geographical reach without the cost of running stores.
After a slow start (and false start with M) Morrisons now knocking out of park with tie ups with this, Ocado and Amazon.— Mark Robinson (@ellandi_mark) August 1, 2017
Peel Hunt analyst Jonathan Pritchard
McColl’s has been conducting the talks about the wholesale contract at the same time as roadshowing after its interims, and the company’s excitement with the tender process has been palpable.
The trial with Co-op, which now presumably rapidly comes to an end, shows that a much higher percentage of sales can be achieved by own-label product, when that own-label range has strength in depth and the sales and gross margin opportunities are material.
“From a Morrisons perspective, this is an opportunity to dip its toe back into the c-store waters. It had its toe bitten off last time with MLocal, but we see no reason why it would not succeed in this guise”
We don’t necessarily share the company’s enthusiasm for the Safeway brand itself but, ultimately, the product will carry all and this upgrade in the range for McColl’s is transformational.
From a Morrisons perspective, this is an opportunity to dip its toe back into the c-store waters. It had its toe bitten off last time with MLocal, but we see no reason why it would not succeed in this guise.
In terms of the margin potential, we see major upside. In the McColl’s model we have a bit of further gross margin appreciation as the mix improves further and the scale from the Co-op deal resonates with suppliers.
So we think that our new forecasts, which are now going to be a country mile ahead of consensus, are extremely underpinned.
This may not be the last headline we see about McColl’s in the next few months. The store portfolio still makes it a very attractive asset and a full bid from another food retailer is not ruled out by today’s agreement.