Morrisons: Riding out the Storm?

The problem with attempting to describe the recent history of Morrisons (MRW) is that while it is easy to be wise from afar, it is also disappointing that the Bradford-based grocer has not been able to hire an armchair supermarket guru thus far.

The most precise summary of what has been going on probably derives from “too much, too little, too late” as the main theme. This describes the £200 million plus paid to online grocer Ocado (OCDO) to turn Morrisons into a 21st century retailer in terms of having an online presence itself. It also sums up the £1 billion the group promised to spend in price cuts over a three-year period starting in 2014.

The worst aspect though is that Morrisons has the problem of trying to become a big-league player in its chosen mini sector, just when the established giants are turning into dinosaurs. Indeed, it can be said that even without the own goals that Tesco has been firing into the back of its net with increasing regularity since 2012, Morrisons seems to have been equally keen on self sabotage.

For instance, it has been unfortunate enough to have to announce the scrapping of 100 new convenience stores, will likely announce its worst profits performance in eight years, a £3 million payment to sacked CEO Dalton Philips, a fraud trial, an insider-trading scandal and perhaps worst of all, a probable 60% cut in the dividend. While it is tempting to say that it does not get much worse than this, the sad fact of the situation is that rather than getting better, the position could deteriorate for deflationary and competition reasons outside the company’s control, whatever strategy is adopted.

Of course, the main problem here is that from the 1980s and beyond supermarkets in the UK were transformed from a largely corner shop model to one of rapid consolidation and new efficiency. Unfortunately, over the past 10 years this has simply become too much of a crowded marketplace, and even though price wars are tipped as being part of the cure, they are as much a symptom of a malaise that so far only the likes of Aldi and Lidl have been able to crack. One would suspect though, that even these upstarts will soon start to feel the pinch as the “race to the bottom” in terms of pricing and margins accelerates.

What the sector really needs is consolidation. But unfortunately we have M&A in the UK at a 17-year low, meaning that none of the slack for supermarkets, and perhaps many other retailers is being taken up. Part of this can be blamed on the red tape explosion from the likes of the Competition Commission, the EU and other overpaid and unnecessary pen pushing organisations. But it would also appear that in a post financial crisis environment, and given the anti fat cat media, we have a situation that many a CEO would simply prefer to stay put.

So what are the best options for Morrisons? Ideally, the company would simply base build and not be drawn into short-term panic measures. It does have plus points, such as being a food producer in its own right, being less in debt than its peers and also being a significant freeholder of its outlets. Riding out the storm would be the easiest and perhaps cleverest way forward, simply allowing the competition to burn itself out. However, in business, as in many other walks of life, sometimes the most difficult thing to do is to sit on your hands.