UK retailer reaps benefits after major overhaul

Two years ago UK supermarket firm Morrisons was in turmoil as it wrestled with acquisition Safeway and racked up the first loss in its 106-year history.

Two years ago UK supermarket firm Morrisons was in turmoil as it wrestled with acquisition Safeway and racked up the first loss in its 106-year history.

The raft of problems encountered during the takeover led to veteran Sir Ken Morrison stepping down as day-to-day boss of the former family business, making way for the polished ex-Heineken executive Marc Bolland.

But since then the retailer has staged a marked turnaround, posting a series of market-beating results to become the standout success story over the recent Christmas season.

Helped by a cheerful promotion drive with celebrities Lulu and Alan Hansen, it has enjoyed double the growth of its biggest competitors Tesco and Sainsbury’s in recent months, gaining market share at their expense.

This week Morrisons confidence was underlined when bosses guided a group of analysts around a flagship new store in York.

The revamped layout featured its distinctive “Market Street” grocery area, new chilled and prepared meal lines as well as extra space for its “At Home”, health and beauty and home entertainment ranges.

It represented a glimpse at the way all stores could look once a planned £450m (€601m) store overhaul is complete.

Bradford-based Morrisons, which is the UK’s fourth largest supermarket chain, is hoping the investment will help it make further inroads into the estimated £120bn (€160bn) grocery market.

The latest research estimate gives the group an 11.5% market share, up from 11% a year ago, and coming mainly at the expense of Tesco and Sainsbury’s.

Food analyst Darren Shirley, from Shore Capital, said Morrisons had clearly been the big winner over the last six months thanks to its Christmas advertising campaign and price promotions, adding that the firm’s recovery was well under way.

But he warned the market needed to see “growth on growth” from the retailer and an outline of its long term strategy before its winning status could be cemented.

The retailer’s TV adverts helped tempt an extra four million customers in to its stores over the festive period.

Mr Shirley said: “Particularly in the stores they acquired from Safeway, there was a perception that Morrisons was a bit downbeat. People were reluctant to go in and shopped elsewhere.

“I think what the advertising campaign has done is surprise people.

“People have gone back into the stores and been impressed – product availability has been high, quality and freshness has been good and they have expanded the range.”

Shore Capital said Morrisons, which currently has 375 stores, planned 10% space growth during the next two years.

The expansion will be through compact superstores of 25,000 to 30,000 sq ft, compared with the 35,000 to 40,000 sq ft outlets that make up the bulk of the estate.

Mr Shirley said the longer term growth outlook could present problems, with Morrisons lacking the international dimension of market leader Tesco, and bigger product lines of Sainsbury’s and Asda.

He said: “Morrison’s has clearly benefited from finally having centralised its operations since the takeover.

“But whether they can maintain their performance and produce good growth on growth remains to be seen.

“The space available for food in the UK is becoming ever more limited, and as we go towards 2011, we see the increases in growth potential becoming constrained.”

Morrisons was focused on the north of England with around 120 stores before it bought the struggling Safeway business in 2004.

The £3.3bn (€4.4bn) deal, which was fiercely contested by the retailer’s rivals, turned Morrisons into a national player with nearly 500 stores.

A three year rolling store conversion got under way, but it quickly ran into difficulty with dual running costs in areas such as distribution, administration and IT.

There were problems amalgamating the financial histories of the two businesses, and bosses admitted leaving customers confused by using Safeway carrier bags in Morrisons stores.

Eventually more than 200 premises were disposed of – mostly to rivals – before the last converted Morrisons store opened at the end of 2005.

New shops – featuring the “Market Street” grocery area – immediately started reaping the benefits, with sales enjoying double digit percentage rises.

The new look was illustrated with an updated “M” logo and a replacement of the decades-old “more reasons to shop at Morrisons” with “fresh for you every day”.

This Christmas the group emerged as the winner among the UK’s “big four” supermarkets after seeing like-for-like sales excluding petrol soar 9.5% in the six weeks to January 6 – well above the 7% expected by analysts.

Broker Panmure Gordon sounded a note of caution about Morrisons prospects, saying the big supermarkets were not immune to a consumer downturn.

Analyst Philip Dorgan said the store visit led to no “Eureka-style” moments, and provided “nothing for the bulls or the bears”.

He said: “We keep coming back to two things. First, the food retailing sector is not defensive in a consumer downturn, despite the blithe assumption that it is.

“We think that the industry is set to become much more competitive and that this will make margin expansion difficult as the fight for market share intensifies.”

Andrew Wade, retail analyst at Seymour Pierce, said Morrisons could expect competition from its bigger rivals to intensify in the next few months.

Tesco has already knocked 5p off a litre of petrol for people spending more than £50 (€66) in retaliation to Morrison’s double points on petrol promotion.

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