Wm. Morrison Supermarkets plc’s Profits Plunge Is Bad News For New Tesco PLC Boss

New Tesco (LSE: TSCO) boss Dave Lewis has enough on his plate right now that I feel almost churlish serving him another another dollop of worry. But yesterday’s dismal first-half results at WM. Morrison Supermarkets (LSE: MRW) will need careful digesting.

Sales at the beleaguered Bradford-based grocer fell 7.4%, excluding fuel and VAT, in the six months to 3 August. What makes this worrying for Tesco is that Morrisons suffered that sharp slide in sales despite launching an aggressive price war.

Which is exactly what everybody expects Dave Lewis to do.

War Games

War? What is it good for? Edwin Starr famously asked. Now we know: it is good for nothing but a 51% drop in underlying profits.

Even a heavily trailed and expensive price slashing campaign, which saw Morrisons attacked discounters Aldi and Lidl on their own turf, can’t stem the collapse in sales or shake off the spectre of sectoral decline.

All it does is slash operating margins, in this case, by 88 basis points to 3.38%.

And that’s bad news for Dave Lewis.

tesco2Price Isn’t Right

Lewis is looking to rebuild customer loyalty by focusing on Tesco’s core values of “price, availability and service”. Analysts assume price slashing will be part of his turnaround strategy.

Tesco has even handed him a war chest to wage his campaign. This has largely been raised at the expense of shareholders, with Lewis handed around £800m from the recent dividend cut. Job cuts could lift that to £1.3bn.

Those arguing that Tesco can make a comeback are putting their faith in the supermarket’s superior firepower. For all its troubles, it should still make a £2.5bn trading profit this year.

But will chucking money at the problem work? It didn’t for Morrisons.

Fresh And Fruity

morrisonsTo be fair, Morrisons hasn’t been completely flattened. Underlying pre-tax profits of £181m actually beat forecasts, which some brokers thought might be as low as £165m.

And in the four weeks to 17 August, figures from Kantar WorldPanel show Morrisons registered a 2.4% increase in sales, boosted by a successful voucher campaign on meat and fresh produce.

So maybe its cost-cutting campaign is starting to bear fruit.

The surprise (and welcome) 4% dividend hike, which takes Morrisons’ yield to a beefy 7.3%, should reassure investors that management will do everything in its power to maintain this healthy income stream.

Its share price down 40% in the past year, against a 4% rise for the FTSE 100. Morrisons numbers look so bad, in fact, they’re almost good.


Now Dave Lewis has to decide his strategy. Cutting prices can play havoc with margins without boosting sales, we have learned that. Although done intelligently, it can work, as the Morrisons voucher campaign suggests.

He should also avoid making any campaign too complicated, because the confusing array of BOGOF and other money-off deals are a regular complaint among Tesco’s customers.

Road To Nowhere

Aldi and Lidl aren’t just winning plaudits for their cheap prices, shoppers are enthusing over the quality of some of their produce. That’s another front Lewis will have to fight on.

He will also have to keep staff happy and motivated, otherwise they will continue to deter shoppers with their perceived surliness. Not easy to do if you’re cutting jobs at the same time.

Morrisons has shown Dave Lewis the road forward. And it will be a very bumpy one.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.