Morrisons should make more of food manufacturing

By Michael Stones

- Last updated on GMT

Morrisons was failing to exploit its strong manufacturing links
Morrisons was failing to exploit its strong manufacturing links

Related tags Food manufacturing Vertical integration Supermarket

Morrisons has been advised to make more of its food manufacturing links by a business recovery specialist, who warned retailers could ditch their suppliers after diversifying into food production.

The retailer’s heavy investment in food manufacturing – now operating more than 15 manufacturing facilities alongside 10 distribution centres – had long been a critical differentiator, said Begbies Traynor. But Morrisons had failed to fully exploit those advantages.

“While leading the way in delivering this vertical integration, Morrisons hasn’t promoted it very effectively to consumers,”​ said the consultant’s partner Julie Palmer.

“It should really be emphasising the provenance of its products with their ‘British’ and ‘Yorkshire’ heritage, which would give them a marketing benefit in addition to the profit margins benefit.”

‘Weaponise’ food manufacturing

The latest advice follows similar recommendations to make more of the retailer’s strong food manufacturing links from leading City analyst Shore Capital. Its analysts Clive Black and Darren Shirley advised Morrisons’ new boss David Potts in April “to weaponise”​ the retailer’s food manufacturing capabilities.

If it is a weapon​ that can be used to differentiate to customers​ [the benefits of shopping at Morrisons] then it is worthwhile,”​ said Black and Shirley.

The retailer's chairman Andrew Higgiinson said earlier this year that food manufacturing will play a key role in the retailer's five-year recovery plan​. 

While Morrisons – now the UK’s second largest fresh food manufacturer – had very much led the way in terms of acquiring businesses to provide more control over its supply chain, other retailers had also spotted the commercial advantages of manufacturing food as well as selling it.

‘Greater control over supply chain’

Smaller suppliers 'in the cold'

“Growers, farmers and small-scale suppliers are being continuously squeezed, as the burden is passed down the line, particularly in the context of this brutal price war.“

  • Julie Palmer, Begbies Traynor

“It is clear that in order to be able to compete with the likes of discounters such as Aldi and Lidl on prices and to retain market share, the larger supermarkets have looked to exercise greater control over their supply chain and the prices they pay in order to sustain healthy margins while still driving volumes,”​ said Palmer.

A more vertically integrated model allowed supermarkets offered that control and greater autonomy in overseeing quality control. “We see this an increasingly prevalent trend within the industry which has the potential to have considerable impact UK supermarkets' bottom lines given that own-brands currently account for 54% of their grocery sales.”

‘Cutting out the middle man’

Following Morrisons’ lead, Asda had also made significant steps to develop its own supplier network in recent years as part of a long-term strategy of ‘cutting out the middle man’.

Since Asda acquired fresh meat producer Kober and Cleckheaton-based meat supplier Forza Foods three years ago both have enjoyed consistent revenue growth, said Palmer. Their success contained a warning for food and drink manufacturers who supply supermarkets. 

“It shows the material benefits of strong relationships with the grocer retailers, and as they continue to develop their own branded products, it leaves the smaller players out in the cold,”​ she said.

“Compounding this is the fact that farmers and suppliers have minimal control over supply chain negotiations, relying on direct suppliers such as packers and processors to negotiate good terms with retailers. Growers, farmers and small-scale suppliers are being continuously squeezed as the burden is passed down the line, particularly in the context of this brutal price war.“

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