Morrisons boss’s customer focus ‘begins to pay off’

25-Jan-2016 - Last updated on 25-Jan-2016 at 13:49 GMT

Morrisons Market Street and vertical integration offered a key point of difference to shoppers

Morrisons boss David Potts’s customer focus is paying off – with its food manufacturing capability playing a key role – but much more needs to be achieved if the business is to achieve its potential, according to city analyst Shore Capital.

Commenting after a meeting with management. analysts Clive Black and Darren Shirley said: “Morrisons is seeking, like its competitors, to serve its customers better but doing so by utilising and maximising its distinctive Market Street capability, including vertical integration.”

Second largest fresh food manufacturer

Morrisons is the UK’s second largest manufacturer of fresh food.

Shore Capital noted that as part of Morrisons’ recovery plan, the retailer’s store improvement programme was unfolding in a manageable way that sought “to involve customers and so be that little bit more local within a controlled context”. Morrisons was aiming to make its core 500 ‘conveniently located’ supermarkets strong again.

“Under [ceo] David Potts’s leadership there is a clear focus upon Morrisons customers and what the business can control in making that experience better to maintain footfall, build basket size, attract new shoppers and drive volumes,” said Black and Shirley.

“Execution is, therefore, key in all its guises, which includes price but a price file that Morrison works in tandem with a proposition that is increasingly tailored and exclusive to its shoppers.”

‘The long journey’

While acknowledging what Potts described as “the long journey”, four factors offered the analysts reasons to be more optimistic about future prospects for Morrisons.

Those were: the de-leveraging – or reduced borrowing – that should ease financing costs in-time, the retailer’s plan to eradicate online losses by financial year 2018, which would represent an upturn of about £30M swing at current operating levels and the disposal and closure of unprofitable stores.

But the most important factor was the potential to achieve positive operational gearing. Positive financial leverage means that the assets acquired with the funds provided by creditors and preferred stockholders generate a rate of return that is higher than the rate of interest or dividend payable to the providers of funds.

“Time will tell if Morrisons can sustain the necessary improvement in trading to deliver a stronger bottom-line output that shareholders can participate in,” said Black and Shirley.

But the “credible new management team” at the helm of Morrisons promised improved business prospects this year.

Shore Capital remained confident that, ahead of financial year 2017, its pre-tax profit estimate of £330M can be achieved by the group. Achieving that would represent 10% growth and would be “good for sentiment towards both Morrisons’ equity and the UK supermarkets”, said Shirley and Black.

Shore Capital makes no recommendation on house stock.