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Morrisons

Morrisons (UK)

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Morrisons became the UK's #4 supermarket retailer in 2004 as a result of the acquisition of larger rival Safeway. That deal elevated what had previously been a regional company into a national player alongside Tesco, Asda and Sainsbury. Originally an offshoot of the US group of the same name, Safeway was established as an independent company in 1987. Its fortunes were bumpy to say the least over the next ten years, but the group finally found its feet in 2001 with an emphasis on fresh food and aggressive pricing. In a bold move to become a national operator, regional group Morrisons agreed to acquire Safeway in 2004 despite fierce competition from a number of other, more powerful buyers. Yet integration of the two businesses proved far more difficult than Morrisons had anticipated, forcing the group to issue an almost unprecedented total of five profit warnings in just the first six months of 2005. Morrisons was back on track by the end of 2006, and delivered strong growth through the subsequent economic downturn. However, trading has been rather more challenging since Christmas 2012, not lease as a result of expansion by discounters Aldi and Lidl. There is no significant threat just yet to Morrisons' position among the Big Four but the market remains challenging.

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Morrisons has made the leap into the Big Four of the UK's supermarket operators, but initially found the process of transformation from regional chain to national giant much more difficult than expected. As Morrisons' chief executive Sir Ken Morrison struggled to integrate the two chains, he must often have wondered if it had been a leap worth taking. However, the enlarged group's financial situation improved significantly by the end of 2006. In 2007, under newly appointed chief executive Marc Bolland, it embarked on a much-needed overhaul of its rather traditional and dowdy image, and this resulted in strong performance during 2008. That year the group won a string of awards from its industry peers, including Retailer of the Year from Retail Week for both 2008 and 2009, Grocer of the Year 2008 from The Grocer and Supermarket of the Year 2008 at the Retail Industry Awards.

The merger of Safeway and Morrisons made the UK supermarket business a four-horse race, with the enlarged group slotting in below Tesco, Sainsbury and Asda. Between them, they control more than 70% of all UK grocery shopping. However, Morrisons has ended up considerably smaller than originally intended. Upon completion of the Safeway deal, the combined estate housed some 597 stores, but Morrisons was ordered by regulators to reduce that figure by 50. In fact, the group ended up selling almost half of the 478 outlets it acquired, mainly as a result of under-performance. By mid 2007, Morrisons controlled an estate of 369 stores across the UK. Following its rebrand, the business began to expand once again during 2008, and it acquired another 38 stores from the merged Co-op/Somerfield group during 2009, and 18 former Netto stores from Asda in 2011.

Prior to the Safeway takeover, Morrisons outlets were almost exclusively situated in the North of England. The addition of Safeway and Somerfield outlets gave Morrisons a stronger national presence, including a profile in Scotland inherited from the Presto supermarket chain which Safeway acquired in 1982. The group also took steps into the convenience store segment for the first time. In early 2013 it acquired more than 60 smaller sites from collapsed chains Jessops, Blockbuster and HMV, most of which were relaunched under what was then the M Local banner.

During 2011, Morrisons share of total UK grocery shopping topped 12% for the first time (compared to a little over 6% before the Safeway acquisition), and share reached a record high of 12.5% in the period to Jan 2012. However, tough trading over Christmas that year eroded all of that growth, and the group has so far been unable to win back that lost share. Since then, share has bounced around somewhere between 10.5% and 11.0%. Morrisons remains strongest in the North, where it has a regional share of as much as 22%, compared to between 6% and 8% in London and the South.

The slide in national share after 2012 was blamed on CEO Dalton Phillips' decision to move slightly upmarket from Morrisons' original "no-nonsense" roots. This came at the same time as a renewed challenge from discount supermarkets Aldi and Lidl, still able to undercut all of the big four retailers on price. As a result, Morrisons announced a new strategy to reposition as a value retailer during 2014, in a middle ground somewhere between the discounters and Tesco/Sainsbury. At the beginning of 2015 there were a total 667 stores, including 153 convenience outlets. However, later the same year, the group effectively quit the convenience sector, selling 140 of the M Local outlets to private investors for £25m. Several under-performing larger supermarkets were also closed, and the group scrapped its "Match & More" price-capping strategy because of the difficulty in competing with Aldi and Lidl. The M Local stores relaunched as "My Local", but continued to perform poorly. The chain was forced to close the majority of its convenience stores the following summer and call in administrators. At the beginning of 2018 the group operated just under 500 stores nationally.

A key area for further development remains online, where Morrisons outsources operations to independent company Ocado. Morrisons was the last of the big four supermarkets to launch an online store. There was much speculation during 2010 that Morrisons might make a bid for online-only grocer Ocado. However, no such offer materialised, and instead new CEO Dalton Philips took a more indirect route, acquiring online baby products retailer Kiddicare for £70m. This became the core of a non-foods delivery business, which launched in 2012. At the same time, Kiddicare opened several large format stores, having acquired the former Best Buy Europe sites in the UK. However the business performed well below expectations and was sold off again in 2014 to private equity for just £2m. Morrisons also acquired a 10% stake in New York's FreshDirect online grocery, with the aim of learning the ropes for the launch of a similar service in the UK. The rollout of an online groceries service was finally confirmed for the beginning of 2014 in a partnership with, rather than a takeover of, Ocado. Morrisons signed a 25-year partnership with the online retailer to provide delivery and fulfillment services. In 2016, the store expanded this wholesale operation with a similar arrangement to supply Amazon's newly launched UK groceries business.

Morrisons has traditionally described itself as the UK's "no nonsense" supermarket retailer and a specialist in food and drink. It sells a broad range of fresh foods, groceries, beers, wines and spirits, with an emphasis on foods prepared fresh in-store, and less space devoted to home and leisure items than its main rivals. Unlike the other major supermarket groups, Morrisons processes and packs the majority of the fresh food it sells inhouse, whereas its competitors tend to contract out those services. All of its beef, lamb, pork and poultry is sourced in Britain. True to its Yorkshire origins, it promises to "shun hype and gimmicks in favour of plain selling" and "honest good value". For example, whereas most supermarkets vary pricing regionally, Morrisons prides itself with always charging the same prices in every one of its stores. Around 55% of all products sold in-store are own brand, and as much as 60% it produces itself. The group's main private label is Farmers Boy, used across a variety of prepared meals, cooked meats and dairy products, supported by premium brand The Best, healthy eating Eat Smart and an organic line. Market Street is the umbrella brand for a broad selection of in-store food counters. Nutmeg is Morrisons' private label clothing and accessories brand, competing against Asda's George, Tesco's F&F and Sainsbury's Tui.

Towards the end of 2016, the group announced plans to resurrect the Safeway brand as the umbrella for hundreds of new private label fresh and shelf-stable food products. These are not sold in Morrisons' own stores, but distributed to independent retailers, especially convenience stores, through wholesale channels. Morrisons has itself largely exited the convenience sector, but sees an opportunity "to leverage its sourcing and unique food maker skills to give independent retailers' customers access to great quality products". From 2018, the group became exclusive supplier of third-party and Safeway-branded grocery products to McColl's, the country's biggest independently owned convenience chain with around 1,550 outlets.

For years, Morrisons used popular TV celebrities to front its marketing campaigns, including former Top Gear presenter Richard Hammond, actor Robert Lindsay and performer Denise van Outen. They were replaced in 2011 by Lancashire-born cricketer Andrew "Freddie" Flintoff and - for the Christmas campaign - Sir Bruce Forsyth. In 2013, a deal was signed to sponsor entertainment duo Ant & Dec's new Saturday Night Takeaway, in return for which the performers appeared in Morrisons advertising. That relationship also came to an end in 2015, and since then the chain has largely avoided celebrity tie-ups in its advertising.

Financials

The integration of Safeway proved to be something of a financial nightmare between 2004 and 2006. Morrisons failed from the outset to win over senior Safeway staff, and was slow to get to grips with the other chain's sometimes labyrinthine financial systems. A serious blow came when it was discovered that £40m of anticipated profits had failed to materialise as a result of Safeway's policy of taking upfront discounts from its suppliers. The group was forced to issue a string of profit warnings during 2004 and 2005 as a result of a decline in trading at Safeway outlets and logistical problems combining the two supply chains. For the year ending January 2006 the group reported the first ever loss in its 38 years as a public company, with a deficit of £250m, compared to a profit of £105m for the previous year. The loss included a £374m charge for restructuring of Safeway and goodwill write-offs.

There was a long-awaited improvement for the following year, and by 2008 the group was back in full growth mode. It appeared to benefit from the shift by shoppers towards lower-priced goods as the economy soured. Performance continued to improve for the next few years, although there was a wobble over Christmas 2012. For the year ending Jan 2013, net revenues grew 3% to £18.1bn, although on a like-for-like same-store basis excluding petrol that represented a 2% decline. Pretax profits fell 7% to £879m. Average weekly customer numbers continued to rise, reaching 11.4m, but average spend per visit was slightly down at £22.63.

The following year proved somewhat more challenging. For the year to Jan 2014, revenues slipped by 2% to £17.7bn, with like-for-like sales excluding VAT and fuel down almost 3%. A large impairment charge against Kiddicare, undeveloped properties and other items resulted in a pretax loss of £176m. Underlying pretax profits excluding charges fell by 13% to £785m and the group warned that this figure was likely to fall by more than half in the year to 2015.

In the end, sales for the year to 2015 slumped 5% to £16.82bn, including store turnover ex fuel of £13.0bn. That represented a like for like decline of almost 6%. As expected, underlying pretax profit more than halved to £345m, and a variety of charges including £1.3bn of impairments against the retail estate resulted in pretax losses of £792m. There was another weak year to 2016, with revenues falling to £16.12bn. There was, though, a return to profit with a pretax figure of £217m.

The new management team finally began to deliver results in the year to 2017, with revenues and profits both on the increase. Turnover up 1% to £16.32bn, despite store closures, represented the first year of like-for-like growth since 2012, helped significantly by the wholesale partnerships with Amazon and Ocado. Pretax profits rose to £325m.

For the year to 2018, revenues rose by almost 6% to £17.26bn. Like-for-like sales ex fuel rose 2.8%. Pretax profits rose 17% to £380m. However a higher tax charge reduced growth in net profit to just 2% to £311m.

Background

US supermarket group Safeway took its first steps outside North America in the 1960s, acquiring a small chain of 11 supermarkets in the UK in 1962, followed by other outlets in Australia later in the decade. The UK operations in particular performed well, expanding to more than 120 outlets by the mid-1980s.

However the international operations never represented more than a fraction of the parent group's sales, and even with 120 British stores, Safeway was only ranked 6th among the UK's food retailers. In 1985 the Australian shops were sold to local retailer Woolworth. A year later, following a management buyout of Safeway in the US, the British chain was sold to fast-expanding supermarket and spirits group Argyll. That company's founder James Gulliver had served as chief executive of UK supermarket operator Fine Fare during the early 1970s, and he subsequently established low-cost wholesaler and manufacturer Oriel Foods, which he sold in 1978. The following year he set up Argyll Group as an investment shell to buy into Manchester-based butcher Louis Edwards. In 1981 Argyll bought back Oriel, together with its Lo-Cost supermarket chain; the following year the group acquired Allied Suppliers, a substantial retail group assembled by corporate raider Sir James Goldsmith, which included supermarket chains Presto, Lipton, Templeton and Galbraith. This was followed by the purchase of manufacturer and retailer Amalgamated Distilled Products (ADP), which owned a small portfolio of whisky and other drinks brands, as well as off-licence chain Liquorsave.

In 1985 Argyll mounted its biggest most ambitious acquisition bid, an attempted £2bn takeover of Distillers Company, the maker of Johnnie Walker whisky, Gordon's and Tanqueray gin. At the time it was the largest takeover bid in British history. But Distillers was also being stalked by Guinness Breweries (now Diageo) and a bitter battle ensued, eventually won under controversial circumstances by Guinness. Argyll abandoned any further attempts to become a drinks company, and instead used £681m from its Distillers war chest to acquire the UK Safeway operation. Gulliver subsequently retired as chairman (and died a few years later in 1996).

The Safeway purchase gave Argyll three major UK supermarket chains, Presto, Safeway and Lo-Cost, as well as a host of smaller brands and Amalgamated Distilled Products' Liquorsave off-licence chain. The majority of outlets were rebranded as Safeway, while Liquorsave and ADP's drinks portfolio was sold in 1991. However a fierce supermarket price war mid-decade created substantial problems for the group. In 1994, Argyll Group restructured, slashing 5,000 jobs as well as more than 100 under-performing outlets. Two years later, the group's recovery was aided by a joint venture with BP to launch a chain of combined supermarket-petrol stations, and a partnership with Abbey National to offer in-store financial services. The parent company dropped the Argyll Group name to become Safeway plc in 1996, and reported record profits for 1997. But the recovery was short-lived. The group came close to a merger with #3 chain Asda to form the country's biggest food retailer, but plans were abandoned after signs that the deal would be rejected by regulators. Following that reverse, Safeway unveiled a string of profit warnings over the next two years.

Light finally appeared at the end of the tunnel in 2000, following the appointment of Carlos Criado-Perez, recruited from Wal-Mart's international division. He launched an aggressive price-cutting campaign on leading brands, a major focus on fresh or ready-to-eat foods, better shelf availability and substantial cash incentives for all staff. In 2000, Safeway's 90,000 employees shared a bonus payout of around £30m, more than doubling the salary of many store managers. Criado-Perez also dropped the store's unsuccessful ABC loyalty card scheme. The strategy worked, and Safeway reported sales growth well ahead of even Tesco, attracting a million more customers into the store. In 2001 the group unveiled the first of 50 planned hypermarkets, and pre-tax profits jumped by a third that year. By 2002, however, growth had once again begun to slow.

In 2003, Safeway announced that it had agreed to be acquired by Morrisons, then the #5 supermarket group. This business had been founded in 1899 by William Morrison, originally as an egg and butter merchant operating from a market stall in Bradford, West Yorkshire. Eventually he opened two more market stalls and later converted them into counter service shops. The real impetus for growth came from the founder's son Ken, who took over the running of what were then just three small shops in 1952. Still in his early 20s, Ken Morrison opened his first town centre grocery in 1958, and went on to become a pioneer of British supermarket development during the 1960s. The company's first supermarket opened in Bradford in 1961 - Ken Morrison couldn't afford city centre rents, so converted a disused cinema on the edge of town. In a nod to the company's beginnings he introduced separate counters like market stalls within each store under the banner Market Street. Sales were beyond even Morrison's own expectations, and a string of other stores followed, also in sub-prime locations. Ken Morrison floated the company in 1967 and went on to deliver an unbroken record for sales and profit growth every year for 36 years. A key development was his decision to take full control of his supply chain during the 1980s, as he acquired or built factories to process and package all Morrisons' fresh produce. He was knighted in 2000 for his services to food retailing.

The Morrisons deal took most observers by surprise. Morrisons was less than half the size of Safeway, with revenues of £4.3bn (compared to Safeway's £9.5bn) and just 125 stores (to Safeway's 480). The rapid emergence of more powerful bidders soon made the Morrisons bid look unlikely to succeed, with most observers initially favouring a cash bid from Sainsbury's or Wal-Mart. By the time competition regulators began scrutiny of the bid battle in March 2003, it was entrepreneur Philip Green (owner of Arcadia) who had become the favourite to clinch the deal, helped by the fact that he had no existing supermarket interests. Following seven months' scrutiny of the market, British regulators ruled in October 2003 that Tesco, Sainsbury and Asda would not be granted permission to acquire Safeway. In November Philip Green also withdrew from the battle, leaving the way clear for Morrisons. But the prolonged wrangling had inflicted considerable damage on the Safeway business. Announcing his new offer of around £3.3bn in cash and shares, Sir Ken Morrison warned that trading at Safeway had deteriorated sharply and that the supermarket was losing market share.

Following completion of the merger in March 2004, Morrisons began to transfer larger Safeway stores to the Morrisons brand. The group was required by regulators to sell off 52 stores, and also disposed of a further 120 smaller convenience stores. These were acquired by a number of other buyers including Waitrose and Somerfield. As a result of the group's trading difficulties during 2004, the management team was restructured in early 2005. Bob Stott was appointed as chief executive, but later announced his retirement. Marc Bolland, previously an executive director of Heineken, was finally appointed as chief executive in 2006.

Having survived - just - the painful takeover of Safeway, Sir Ken Morrison retired as executive chairman in March 2008 after more than 50 years at the helm of the business. He was replaced as non-executive chairman by Sir Ian Gibson. He relinquished any direct link with the company, and by the end of 2016 had a shareholding of less than 1%. He died in Jan 2017 at the age of 85. His niece and her husband - Susan and Nigel Pritchard - retain a combined holding of just over 8%.

Last full revision 27th March 2018

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