Morrisons’ results ‘to suffer from Asda’s Netto acquisition’

By Mike Stones

- Last updated on GMT

Morrisons' results are likely to reflect sharper competition from its competitors - particularly Asda
Morrisons' results are likely to reflect sharper competition from its competitors - particularly Asda

Related tags: Morrisons, Supermarkets of the united kingdom, Asda

Asda’s acquisition of Netto stores will prove a key factor in Morrisons’ announcement of difficult first-half trading for 2012/2013, when it reports interim results on September 6, predicts Shore Capital analysts Clive Black and Darren Shirley.

“Morrisons has been particularly adversely impacted by Asda's successful acquisition and subsequent conversion of Netto stores,”​ said Black and Shirley.

“A considerable number of these acquired stores are located in localities in Morrisons' northern England heartland. As such, their increased competitiveness under the Asda banner represented a negative share shift for Morrisons over the other major players.”

But Morrisons may be through the worst with respect to this particular challenge, they added.

Shore Capital said Morrisons’ underlying perfomance had been “subdued and the business has underperformed its superstore peers”.

Sharper competition

In addition to sharper competition from Asda and others, Morrison’s results are likely to be impacted by challenges associated with its store modernisation and the introduction of Fresh Formats plus reduced consumer spending.

“Morrisons has embarked upon a store modernisation and change programme that we believe poses challenges as well as opportunities,”​ said Black and Shirley. They suggested the retailer’s plans to ensure 48 updated ‘Fresh Format’ stores would be trading by the end of July were “likely to have negatively impacted Morrison's sales due to store disruption”.

They feared 'Fresh Formats might be “falling between two stools".​ They might be “disenfranchising core value-based customers with a higher category fresh food offer that has, as yet, failed to entice more affluent ones”.

Asda and Aldi could have benefitted most from the transfer of value-based customers in Morrisons’ trading heartlands, said Black and Shirley.

‘Distracted management’

Implementing the Fresh Formats plan may also have distracted Morrisons' management at a time when “aggressive new trading tactics were starting to particularly impact the market”, ​they added.

Continued pressure on shoppers’ spending is also affecting all retailers. “At a time when Morrison is arguably moving up the value chain, there is the most extensive evidence for some time that trading down is a feature of the UK food market.

For example supermarkets’ private-label value lines are gaining share over premium ranges at a seemingly widening rate, deep-discounters (Aldi & Lidl) continue to gain ever stronger consumer support and strong evidence persists of the compression of basket size through lower wastage.”

Also, Morrisons had limited presence in the growing convenience segment and still no participation in grocery online.

Shore Capital identified a current pretax profit estimate of £422M and retained its ‘sell’ advice on Morrisons’ stock.

To read how the retailer cancelled a meeting today (August 28) with its delisted cheese supplier Wyke Farms, click here​.



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