Can Wm. Morrison Supermarkets plc Rule The World?

The retailer’s new advertising campaign “Morrisons is cheaper” does not just relate to its product price reductions, it also applies to its current share price. Morrisons (LSE:MRW) is promising the new price strategy is not a gimmick and prices will be permanently lower — and investors are hoping this is where the correlation ends.

The share price has fallen as the company revealed poor sale numbers and revealed it is continuing to losing market share to new discount retailers: like-for-like sales fell 2.8% last year.

Investors are bailing out, and former director Roger Owen has been vocal in his opinion comparing the Bradford-based grocer to “a supertanker heading towards an iceberg” — he is calling for the scalps of the current CEO, Dalton Philips and chairman Sir Ian Gibson.

Morrisons is the product of the lifelong vocation of the now-retired Sir Ken Morrison. Over his 55-year career as chairman of the company, Sir Ken grew his father’s market-stall business into shops, taking it public in 1967. It joined the FTSE in 2001 and is now the fourth largest retailer in the UK.

It has over 500 stores across Britain, and subsidiaries that include a manufacturer and distributor of food products, a meat-processing business and a wholesale flower business. It recently launched an online store in partnership with Ocado.

The UK’s biggest retailers and their revenues (Retail economics 2013):

Retailer Sales £m (ex VAT) Employees (FTE) Stores Sales area 000?s sqft
Tesco 43,579,000 18,500 2620 38,435
J Sainsbury 23,303,000 115,122 1205 17,750
Asda 22,843,000 118,755 583 17,737
WM Morrison 18,116,000 86,294 599 11,900

In response to the disappointing group results, CEO Dalton Philips has come out of his corner fighting. In what seems like a battle cry, he has announced a strategy for store-wide price reductions.

To ensure that the company is combat-ready for a protracted price war, significant investment has been promised which will enable Morrisons to compete aggressively, including divestment from non- core activities, sale of some freehold properties and a reduction in capital expenditure, which will result in a free cash-flow improvement of £1bn over the next three years. 

Can Morrisons turn around its fortunes and rule the world? It could depend very much on whether Tesco chooses to join the price war, as it has far more buying power than its main competitors added together.

However, there is still a golden nugget in the pan for Morrisons, in the guise of its food-manufacturing divisions. It has invested heavily in this area and it is on target to become the UK’s largest manufacturer of fresh food by 2015.

The retailer is unlikely to ever become the ruler of the retail world with the likes of Tesco and Walmart to contend with, but a stealth run to become the UK’s No 1 fresh food manufacturer could likely nudge them up the leaderboard in the not too distant future.

Are the retailers too risky right now? 

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Lisa Walls-Hester does not own shares in Morrisons. The Motley Fool has recommended shares in Morrisons.