Stuck in the Middle
Why supermarket Morrisons finds itself in a trough
Morrisons has fallen into a poorly differentiated valley between two market peaks. Chris Middleton and Stuart Lauchlan explain what it needs to do to compete in the shopping centre – and the data centre. Meanwhile, Amazon lurks in the shadows…
UPDATED SEPTEMBER 2014
When supermarket Morrisons announced full-year pre-tax losses of £176 million for the year to February 2014, against a profit of £879 million the previous year, analysts lined up to claim that this signalled a price war on the UK’s high street. In financial 2014, Morrison’s financials have taken another dive: year-on-year sales slumped by 7.4 per cent in the first six months of trading, while underlying profits have fallen by over 50 per cent. So what’s going on on Britain’s high streets?
Outgoing chairman Sir Ian Gibson has credited “discount retailers” – by which he means Aldi, Lidl, Poundland, 99p stores, and so on – for driving the real innovation in the market. “The discount sector has performed strongly, driving much of the market growth,” he said earlier this year. “The rest of the market has been working hard to counter this threat.”
Morrisons’ market share declined by 0.5 per cent in fiscal 2013, while Aldi’s rose by 35.3 per cent and Lidl’s by 17.2 per cent.
ANALYSIS: Morrisons is reacting to a downward spiral in its profitability by engaging in what it sees as a race to the bottom on price. But this misses the point about what is really happening in both bricks-and-mortar retail and online shopping – which, as Strategist magazine has separately explored, are merging into a single multichannel experience.
Morrisons’ woes are another indication of poorly differentiated middle-markets being pulled apart by a polarisation in buyers’ habits and preferences, a trend explored in depth in Neil Gibb’s report, Subsititute!.
Price is an important part of the mix – but only in terms of products that are already highly commoditised. Increasingly outmoded concepts such as ‘upmarket’ and ‘downmarket’ are not what this rift is about either – if it were, then the growth in “the discount sector” wouldn’t be being driven by affluent middle-class shoppers.
While it’s true that a broad range of online outlets – including Ocado and Tesco – have redefined the concept of convenience shopping, this market divergence is increasingly about attitude, service, and evolving, responsive product lines.
Attitude, not price
As a result, a range of very different retailers are competing to offer either greater exclusivity, depth and more personal service on the one hand, or faster, lower-cost and more responsive products and services on the other. This trend applies as much in the datacentre as it does in the town centre.
Indeed, the assertion that the retail sector is all about bricks versus clicks, or upmarket versus downmarket, is fast becoming an outmoded proposition.
Digital channels are no longer simply an alternative to bricks-and-mortar retail; they are becoming an essential complement to them – where people receive personalised offers, use their phones and tablets in store, or order online and pick up from local outlets.
What matters in this new environment is what different outlets can offer the customer: a more exclusive, personal, niche, or aficionado experience, or a faster, broader and more responsive one – depth versus surface, in other words. In that environment, goods that are already mass-produced and mass-distributed will be bought on price alone, and currently the ‘pound stores’ have the upper hand in identifying what those items are.
Beyond that, price is not necessarily the main differentiator in retail as a whole, as on-demand production (and emerging 3D printing technology) means that more unusual items no longer have to sit unsold in warehouses. In turn, this equates to lower unit costs.
So the challenge facing Morrisons in its own part of the retail sector – groceries – is much deeper and more complex than competing with Aldi and Lidl on price. First, and most importantly, it needs to identify which pole it moves to in terms of attitude and innovation.
But the second, longer-term, challenge is to do with technology, and there Morrisons has a mountain to climb, after years in which competitors, such as Sainsbury’s and Tesco, have invested in a mix of loyalty schemes and digital infrastructure that allows them to offer truly responsive and personalised retail.
To its credit, Morrisons understands that it has neglected this side of its business. Gibson, who announced in June 2014 that he would be stepping down, said: “Morrisons has not been able to participate fully to date, due to outdated IT infrastructure and systems.
“We do not yet have a meaningful presence in online and convenience – the two fastest growing channels in the grocery market. [This has] clearly held us back, and the overall performance of our core business has been disappointing.”
In an attempt to address that, Morrisons’ CEO Dalton Philips last year pledged £300 million over six years to completely overhaul the firm’s digital infrastructure. In its March 2014 financial statement, Morrisons confirmed: “The prime focus for the past year has been on improving our supply chain and forecasting through the introduction of new tools. The solution replaces legacy systems for the management of the warehouse, updates core systems for the management of product information, and implements new systems to enable electronic communication with our suppliers.
“This technology has provided us with the ability to track stock at every stage during its journey through the warehouse, improving accuracy and enabling us to improve our service levels and availability in store.”
The statement added: “This comprehensive and business transforming project has enabled us to exceed our three-year savings target of £100 million. More importantly, it has provided us with an outstanding IT infrastructure that will allow us to drive even more efficiencies into the business in the years ahead and we will soon be in a position to decommission our legacy IT systems.”
But is this too little, too late? Either way, Morrisons suffered a further blow to its ambitions when it lost head of digital development Simon Harrow, who resigned in April 2014.
Morrisons has some catching up to do as it casts around for a new strategic head for its digital business. It was January 2014 when the company finally dipped its toes into the online groceries market – years after its major competitors, Tesco and Sainsbury’s. At the moment, Morrisons only delivers goods to around 20 per cent of UK households, mainly in Warwickshire and Yorkshire.
As part of a more aggressive digital expansion, Morrisons intends to sell off its online baby goods arm, Kiddicare, which was acquired in 2011 with the intention of using the technology in its online food operation. In the event, Morrisons teamed up with Ocado, the former online groceries arm of Waitrose, leading to cost write-offs of £27 million in the first half of 2013. Also on the way out is Morrisons stake in New York-based online grocer, Fresh Direct.
Former head of digital development Harrow joined Morrisons with the Kiddicare acquisition, which may offer some clues to his sudden departure in April.
CEO Philips – who waived his bonus for last year – insists that even if the firm was very late to market, its online proposition is now ahead of internal expectations: “Convenience, online, and the discount channels are the fastest-growing sectors of the market and this trend is expected to continue. This will be reflected in changing format development as retailers look to align with ever-evolving customer needs, behaviours and attitudes.
“By the end of 2014, the online grocery market is expected to grow to £7.7 billion, up 18 per cent on 2013, and is forecast to grow to £14.6 billion by 2014, when it is projected to account for 7.1 per cent of the total UK grocery market – almost double what it is today. It presents an exciting opportunity for Morrisons.”
Morrisons already runs a ‘Morrisons Miles’ scheme linked to fuel sales, but 5.5 million of those sales are unregistered and, as such, are essentially useless in providing the depth that Tesco’s ClubCard and Sainsbury’s Nectar card already generate for Morrisons’ rivals. But it has announced plans to launch a Morrisons card later in 2014, building on the fuel scheme.
Philips explains: “The bigger opportunity lies in the 12 million customers who shop with us in store. Getting to know them – who they are and what they want – will enable an even greater opportunity to focus where we invest.
“We now have the necessary systems capability and have commenced trialling a distinctive and customer-focused Morrisons card, which we expect to roll out before the end of the 2014-15 financial year.”
All this is good news, albeit late in the day. But the online grocery space faces another threat: Amazon, which is expanding its Fresh grocery business within the US, and reportedly ramping up plans to launch in Germany as a stepping stone to a global push.
At the Retail Week Live conference in March 2014, Ocado CEO Tim Steiner said: “What Amazon is clearly doing is awakening the global grocers to the online challenge they are going to face and they are accelerating the opportunities for us as a platform partner provider.
“Ask me who will be our biggest competitor in online grocery in 20 years’ time: is it more likely to be Waitrose or Tesco or Amazon? I would place my money on Amazon.
“Grocery retailing over the next 20 years is going to be driven by technology. I don’t rate the technological skills of my competitors versus the technological skills of Amazon.” TSTweet
We see in colour.