When I think of supermarket chain Wm Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Recovery potential
In many business areas, it’s folly to try to win customers by being the cheapest operator. If the only selling point you have is that you are cheaper than the other guys, you could end up with lots of work and very little profit, which all nets out to working hard for a low wage. Many small businesses seem to make that mistake and quite a few new-but-not-so-small businesses, too.
One model that helps overcome the undesirable merry-go-round of high-volume, low-margin grinding is to concentrate on differentiating and concentrating your product offering. That means making your service or product appeal to customers because it is different and better than that offered by your competitors, and concentrating on a narrow range rather than trying to be all things to everyone. In that way, you stand a fighting chance of developing real expertise, excellence and unique appeal to your customer base.
Supermarkets seem stuck in the middle of these two apparently opposing approaches to business. On the one hand, customers doing their regular food shopping will be frustrated by a narrow product range no matter how great the quality and unimpressed if their bills are too high. On the other hand, a cheap but austere shopping environment with no frills, no café and no unique or ‘special’ products to buy would remove the quality of the shopping experience.
The ‘trick’ for supermarkets seems to be to balance a wide product range and good value on customer staples with a great customer experience and a choice of upmarket luxuries. Morrisons seems a little out of balance right now and that shows in the recent full-year results with like-for-like sales down 2.8% and underlying pre-tax profit down 13%.
Anecdotally, I’d say that the bit that needs tweaking is the ‘good value on customer staples’ bit. Although I’ve been a loyal Morrisons shopper myself for years, in recent months my spend has been spread around, some of it going to the likes of Asda, Tesco, Aldi and Lidl , as their prices seemed to underline how Morrisons’ prices were getting a bit high. In almost a decade, that’s never happened before, which makes me wonder whether other customers have been feeling similarly.
1) Resilient cash flow
However, Morrisons is still doing many things right. The directors reckon the on-line operation has started well, there are over 100 new M-local convenience stores trading, and Fresh Format is now in more than 200 stores. The firm is doing a lot to enhance the customer experience and these latest downbeat results have brought a concentrated focus on cost cutting and efficiency.
There’s no doubt that the post-recession trading environment is tough for the supermarket sector, but share-price weakness now could present investors with a buying opportunity. Morrisons seems set to adapt and tweak its operations going forward and that presents the possibility of the firm becoming something of a recovery play in the sector.
The company’s cash-flow record underpins the investment proposition:
| Year to February | 2010 | 2011 | 2012 | 2013 | 2014 |
|---|---|---|---|---|---|
| Net cash from operations (£m) | 735 | 898 | 928 | 1,107 | 722 |
Cash performance is down this year, but not out. That’s encouraging.
What now?
In a display of confidence, Morrisons hiked its dividend by 10% recently and that forward yield, running at about 6% for 2016, looks attractive.
