Morrisons (LSE: MRW) has long been the laggard of the supermarket sector, well behind the field in convenience stores and online sales.
They are two segments it can ill afford to ignore. They are showing double-digit growth in an industry where feeble overall growth has led to fierce and profit-sapping price competition. Total sales in ‘core’ supermarkets actually fell last year.
That’s one reason Morrisons’ share price has lagged, too: its stock is up just 5% over the past 12 months against a 16% rise for the FTSE 100 and 22% and 12% for Sainsbury’s and Tesco respectively.
But last week CEO Dalton Philips underlined how Morrisons is moving fast to catch up, with 2015 set as the target date to be truly multi-channel and multi-format.
Morrisons’ deal with Ocado is transformational. It’s buying Ocado’s central distribution warehouse, and using the loss-making firm’s logistics and technology. Mr Philips claims this is leapfrogging his competitors’ online offerings, and the £200m+ price tag is small compared to the cost of development in-house. Industry analysts are split on the merits, but the 25-year life of the deal is worrying. Just think how the online world has changed since 1988!
The roll-out of convenience stores has been accelerated by the purchase of former Blockbuster, HMV and Jessops’ high-street sites. Morrisons plans to increase the number of its M Local stores from 12 to 100 over the course of this year, and to keep adding two a week in 2014.
Mr Philips has stressed that there were no plans for online or convenience stores when he arrived in 2010, despite the fact that competitors started in the nineties. But what has most held back Morrison is its antiquated systems, with much of the blame for that laid on the company’s poorly executed acquisition of Safeway in 2004.
The company is now spending £300m upgrading systems. Apart from facilitating the two new distribution channels, this has two knock-on benefits. It should reduce costs: many routine activities such as daily cashing-up used to be done manually. And it will enable Morrison to offer more varied promotions — vital to competitiveness.
Put these moves together with Morrisons’ distinct competitive advantages — its emphasis on fresh food and a vertically integrated model producing and processing much of its own stock – and Morrisons could become a tougher competitor. But will its shares also leapfrog the competition? On a prospective price-to-earnings ratio of 11.1, Morrisons is rated the same as Tesco. For my money, Tesco’s turnaround — starting from a market-leading 30% share — is a better bet than Morrisons’ catch-up.
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> Both Tony and The Motley Fool own shares in Tesco. The Motley Fool has recommended shares in Morrisons.