You can’t blame Morrisons’ (LSE: MRW) (NASDAQOTH: MRWSY.US) CEO Dalton Philips for starting the supermarket war. His commitment of £1bn over three years to reduce prices follows similar initiatives at Tesco and Asda. Just as real wars start, it’s a progressive slide into hostilities brought on by incremental retaliation.
While shoppers will benefit at the expense of investors in the near-term, ultimately a price war should prove a good thing for both groups. In the aftermath of the recession the big four supermarkets have suffered from a German incursion, Aldi and Lidl annexing middle class customers with discounted prices at the expense of choice. Their product range is less than a tenth of the big four. Unless the mainstream supermarkets fight back we’ll emerge from austerity with a sub-Soviet style grocery sector displaying cheap n’ cheerless denuded shelves.
The Grand Old Duke of York
But Mr Philips is at fault for a raft of strategic reversals that begs comparison with the Grand Old Duke of York. Mr Philips marched Morrisons’ army of shareholders and employees up market, now to march them down market. He bought Kiddicare to move into non-grocery and learn about online sales, only to now sell it — ironically, with big property write-offs.
Mr Philips bought a stake in US online grocer Fresh Direct; now he’s going to sell it. Arriving late to online business, Morrisons switched tack to tie up with Ocado — an expensive deal yet to prove itself. The firm’s late arrival to convenience stores meant, according to Mr Philips, that it would learn from others’ mistakes — yet it re-branded the chain last year, adding the name of ‘Morrisons’ in front of the original ‘M local’: the convenience store that dared not speak its name.
Conditions in the sector are tough, but it’s hard to see these setbacks as other than self-inflicted. That must now put investors’ confidence in Mr Philips in question. Yet the company is embarking on a significant change programme, with big execution risk. Morrisons has bought itself headroom to underperform with its massively deflated profit outlook.
Upside
The shares are at their lowest in eight years, yet it would still be a brave investor who bets on a successful turnaround. However, there’s some potential upside — and downside protection — in the form of the Morrison family and activist investors. A take-private bid remains an outside possibility.
Meanwhile, Morrisons expects to increase its dividend despite more than halving earnings expectations. It’s a great yield if you think it can maintain that promise – and there’s free cash flow to support it.
