The 'Morrisons effect' hits UK retailers

City analysts had widely forecast poor results from the beleaguered retailer after Morrisons’ profits warning in January. But none predicted the scale of the collapse in the retailer’s earnings, compared with the profit of £879M delivered in the previous reporting period. The prospects remain little brighter, as the firm predicted profit would dive to between £325M to £375M, following its pledge to cut costs and lower prices as it combated the hard discounters Aldi and Lidl.

A key part of the supermarket’s strategy was redirecting savings valued at £1bn over the next three years, including the proceeds of property sales into more competitive prices. The retailer owns about 90% of its estate, compared with Tesco and Sainsbury, which own between 65–70% of theirs.

Out-of-favour and weak sector ​

Shore Capital – in a note titled ‘UK supermarkets: the Morrison effect’ – commented on how poor trading was forcing both Morrisons and Tesco to cut new store openings in an attempt to consolidate their finances in the face of the discounters’ onslaught. “Morrisons, alongside Tesco, is more or less scrapping its supermarket development programme in the UK, with capital expenditure from the former set to run from financial year 2016 onwards at about £400M each year,”​ said Shore Capital analysts Clive Black and Darren Shirley. “We believe such decisions will, over time, represent good news for an out-of-favour and weak sector.”​

The Economist Intelligence Unit saw the Morrisons’ result as evidence of a sea change in British retailing. Its retail analyst Jon Copestake said: “Morrisons’ loss might be disconcerting for some observers, but it does reflect a necessary level of investment from the retailer in order to address a changing retail landscape.”​

Those changes were characterised by the continued polarisation in the market. “With discounters undermining the market share of mid-market sellers such as Morrisons and Tesco, bearishness for the coming year is also unsurprising,”​ he added.

Lack of trust ​

Shore Capital claimed British consumers had lost trust in supermarket pricing. “The big four players continue to face a lack of trust in their pricing, often over-promoting, encouraging shoppers to go where matters are more authentic, more simple and more trustworthy; limited range discounters, high street value retailers and premium plays,”​ said Black and Shirley.

Meanwhile Dalton Philips, boss of Morrisons, was convinced keener prices, coupled with the retailer’s dedicated supply chain would lead shoppers to favour his stores above discounters' outlets.

“There is a tipping point where the price perception gap has just widened too far between all the big four and the discounters and we are going to address that,” he said. “Price is the most important thing but the assortment you offer, the quality of what you offer, the service and the ease of service – they are all things the discounters just can't offer.”​