Morrisons is dipping its toe into the convenience market, the latest in a series of bold initiatives under new chief executive Dalton Philips. Tim Danaher travels to Yorkshire to see the results
The Dalton Philips revolution at Morrisons has already brought an online kidswear retailer based in Peterborough, a Derby-headquartered importer of flowers and a supplier of fresh-cooked meals to New Yorkers into the fold.
The next stage of the project is closer to home, and is being started from scratch rather than by acquisition. But while it’s only one small store for now, the launch of convenience chain M-Local has the potential to be one of the most significant of his new initiatives.
Last Friday, the first M-Local opened in the well-heeled West Yorkshire town of Ilkley, the first of what Morrisons hopes can be a nationwide network of c-stores.
But at a time when the food retail market is under more pressure than it has been for years, and all its rivals are also fighting it out to acquire more convenience space, is now the right time for Morrisons to be moving into this most competitive of markets? And is it possible to translate Morrisons’ strengths in fresh food to a store of just 3,000 sq ft?
Fresh food dedication
Philips is confident that is exactly what Morrisons has done with the Ilkley store; 40% of the space in the shop is dedicated to fresh food and he claims the store features 30% more fresh products than any of its rivals’ c-stores.
Unusually, Morrisons has pledged that fresh food will cost the same at M-Local as it does in all its full-size stores, unlike rivals who generally charge a premium.
“We’re doing something unusual, and saying we’re offering the best price in the market for convenience. We are going to be a challenger brand in the convenience market,” he asserts.
Philips says M-Local will be able to offer such a comprehensive fresh range by completely changing the normal way in which c-stores are supplied.
The Ilkley shop will be serviced by the full-sized store eight miles away in Keighley – its so called ‘hub’ store. This will enable the smaller branch to sell about 125 items freshly made at the larger shop that day.
A van will shuttle between the two, replenishing the convenience store from the hub store in Keighley. So whereas another retailer’s convenience stores might get two or three deliveries a week, the Morrisons store will get at least that number every day and more if required. And that enables Morrisons to offer some unusual services that wouldn’t normally be expected in a convenience store.
So customers who want a particular steak cut to a specified thickness that evening will be able to drop in on the way to work and order it to collect on the way home that evening.
As long as the product is ordered by 11am, Morrisons promises it will be delivered from the Ilkley store to Keighley by 5pm. Morrisons retail director Mark Harrison predicts this service will prove particularly popular in Ilkley, an affluent area with a high number of people commuting to Leeds to work.
There are also some neat customer service initiatives in the store. The wine section features a touch-screen selector enabling customers to input what they’re eating for dinner and receive wine recommendations back.
A fixture of locally produced products and a grind-your-own coffee device to appeal to the upmarket local catchment have also been provided, while technology aficionados will be interested in one of the first store-wide deployments of electronic shelf-edge labelling in the UK.
Compromises have had to be madein order to squeeze everything in while retaining an environment that feels unusually airy and spacious for a c-store, so the ambient offer is focused on top-up shopping with space saved by offering a limited number of options within categories, for example, such as washing liquid.
While equal pricing has been promised on fresh food, margin is maintained by slightly higher pricing on ambient goods than in Morrisons’ other stores, and a strong bias towards private label, with its attendant margin benefits.
A convenient truth
But while Ilkley is an affluent place, the aim is to lead on price in the town. Philips claims that on a £46 basket the store is £9.34 cheaper than the local Tesco Express, and cheaper than the town’s full-sized Tesco, Booths and Co-op stores too.
While the market for c-store sites is highly competitive, Philips is confident there is room for M-Local to make an impact. He points out that despite the growth of Tesco, Sainsbury’s and Marks & Spencer’s convenience offers, only 15% of the UK’s c-stores are in the hands of the multiples.
Two more M-Locals will open this year – in Wilmslow and Widnes – at different types of location to test how the format works in town centres and suburbs.
The plan is to build a national chain once the concept is proven. But this will take time to develop on a store-by-store basis, particularly when small store expansion is on the agenda of all the big grocers.
“With well over 450 supermarkets and superstores, Morrison needs a meaningful number of convenience outlets for the format to make a difference to the group’s long-term earnings momentum,” says Shore Capital analyst Clive Black.
That’s why Morrisons is understood to be taking a close interest in the auction of Iceland, a process which appears to be moving at a glacial pace, although Morrisons’ directors declined to comment on their interest.
Although many of Iceland’s stores are in tertiary locations, there is understood to be a core group of about 100 in outstanding locations, which would lend themselves well to a mainstream convenience business.
A breadth of ambitions
The convenience operation is a vital plank of Morrisons’ ambitions, but it isn’t the only one. Philips used the Ilkley launch to outline his strategy for the business generally, which includes extending its reach – 7 million UK households are still without easy access to a Morrisons store – through adding 2.5m sq ft of new space, plus releasing 750,000 sq ft of ambient space through more efficient ranging to allow new categories to be introduced.
The fruits of this project are being demonstrated in the so-called Lab Store in the Leeds suburb of Kirkstall. The trial – which aims to create an environment that reinforces Morrisons’ strengths in fresh food, while also allowing new categories to be piloted – was launched last October and Philips says its performance has been sufficiently good – a double digit increase in sales – for the model to be rolled out. “We targeted 10% growth and we are where we need to be,” he says. Deli sales are up 31%, butchery 8% and produce 9%.
Having proved itself in the north, the concept is to be tried in the south, with a further three stores to get the treatment by the end of the year. St Albans is expected to be the first test-bed in the south. “We’ll be taking this to a number of stores further south later this year, then roll it out next year,” says Philips.
The model “liberates” space at the front of the store, to use one of Philips’ favourite terms, to increase the area dedicated to produce by 20%, using low fixturing to allow views from the front to the back of the store, pulling product right to the entrance, and introducing 200 products not sold elsewhere in the chain. Some of the product is displayed on ice, and some is hydrated by a mist of vapour, which not only adds drama but extends products’ shelf lives too.
Some believe this new focus on produce is needed because Morrisons’ produce offer is actually not as strong as it is perceived to be. “Morrison knows that it has food quality and mix issues that need to be resolved and time will tell if it can sustain a like-for-like product price gap with its competitors,” says Black, who describes improving the quality of the offer is the “raison d’etre” of the Kirkstall trial.
The venture will be refined based on experience at Kirkstall. Philips says the wine selection looks a fraction too expensive but the new approach to produce, cheese and “fresh to go” has worked well.
The flower assortment – supplied by Flower World, the supplier that Morrisons added to its manufacturing arm earlier this year – has also been transformed, with sales up 43%, and a garden centre dropped into formerly dead space at the front of the store has also done well and will be repeated elsewhere.
Children’s clothing – installed in space released by rationalising the ambient assortment – has worked well too. Philips says that after longer opening hours (which have been implemented), the next thing customers asked for was kidswear, which has been introduced into the Kirkstall store in partnership with Peacocks. “We could put this into 400 stores because we’ve liberated the space,” Philips says.
Exploring the web
While the stores remain the core of the business, Philips has also accelerated the expansion of Morrisons traditional strengths as well as setting out to develop new ones.
Philips reaffirmed his faith in Morrisons’ vertically integrated model. The retailer is the second biggest food producer in the UK and Philips wants to make more acquisitions to continue to build this part of the business, which in turn is vital to maintaining margins.
And then there’s online. Next year Morrisons intends to launch a non-food online offer, using the infrastructure of Kiddicare, the pioneering Peterborough-based nursery retailer that it bought earlier this year.
It is also gearing up to move into online food retailing following an acquisition of a 10% stake in pioneering US business Fresh Direct.
Philips said the deal was done because there were no examples of UK retailers making money selling food online. “We had 17 consultancy firms in – all of them could outline a route to profit but none of them could show an example of who they’ve done it with,” he says.
So the decision was taken to take the stake in Fresh Direct and Philips says Morrisons is “learning tons from that – about assortment, service, fulfilment and marketing”. Not launching an online food business here until 2013 doesn’t faze him, on the basis that it means we “will be able to leapfrog everyone else.”
But the big opportunity in the short term lies in the existing core business while the new ventures represent interesting avenues to explore, says Black “At present they amount to a series of worthwhile, interesting and potentially important activities, but they do not and should not be the basis to materially impact the valuation of the share for some time,” he concludes.
At the moment, helping customers navigate the consumer downturn is what will ensure Morrisons remains successful, winning market share not just by focus on product but with an aggressive promotional stance through campaigns such as the Morrisons Price Crunch and Fuel Britannia.
“It’s been about being relevant and we’ve captured the mood of the nation,” says commercial director Richard Hodgson. “Fuel Britannia was a success even though the cost was negligible.”
But while doing that, the online trials, the lab stores and M-Local enable the retailer to explore a range of routes which could point the way to the future of Morrisons.
As number four in food retail, Morrisons has room to grow. And while not all the experiments will take off, the chances are that at least some will, giving Morrisons growth in a market where growth is going to be hard to come by.
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