What Management Would Prefer You Didn’t Know About Wm. Morrison Supermarkets plc

It’s as if Wm. Morrison Supermarkets (LSE: MRW) doesn’t ‘get it’. What can you do, though, when the market turns against you?

Today I want to outline what management would prefer you didn’t know about Morrisons — that it is slowly being squeezed out of the supermarket business. If it wants to survive, it will need to change its spots, and quickly.

Latest results

The supermarket chain recently reported that like-for-like sales fell 6.3% in the 13 weeks to November the 2nd. Total sales, excluding fuel, dropped 3.6%. On the plus side, the fall in like-for-like sales for Morrisons is smaller than the 7.4% drop in the previous six months. It’s hardly something to get excited about though. In fact one City analyst described the results as “dismal”.

Here’s another one of those ‘it’s not as bad as it was’ numbers that Morrisons is actually ‘promoting’ right now: it turns out the average number of items bought by customers is now down by just 2.4% — better than the 7% recorded last year. Does that mean shoppers are not less likely to shop for less? What a weird metric to highlight.

The response

Morrisons, to its credit, has come out fighting — a £1 billion uppercut to be exact. It’s a nice round number but the retailer says it’s throwing the money towards implementing price cuts, and improving the quality of its food offering. It’s also launching a loyalty card that pledges to match the prices at Aldi and Lidl. If that doesn’t work, it’s offering customers points on their loyalty card that will eventually be converted into £5 vouchers to use in stores.

The reaction

It’s all left some analysts scratching their heads. You see, if you’re trying to match your competition on price, it helps to have a similar cost structure. Even a similar business model would be good. Morrisons, though, is stuck in no man’s land. It simply doesn’t yet have the micro-economic framework to beat or even match the discount stores on price. That largely because it’s not a discount store. The problem is that Britons are suffering from falling real wages and price deflation — so the stores that are ‘naturally’ low-cost/low value are an obvious choice for the consumer, not a store like Morrisons.

You can’t have it both ways

Here’s where it gets frustrating. Morrisons still has the choice of focusing on the premium end of the market. Take, for instance, these two brands: NuMe, a health foods range with chilled, frozen and ready-to-go products; and M Signature, a high end, premium range of foods. Instead, it’s choosing to compete at the lower end. City analysts say that any attempt to compete with the likes of Aldi and Lidl are likely to be frustrated because of the failure of quantity demanded to pick up following the price cuts. Or put another way, Morrisons isn’t likely to get the ‘bang for the price-cut buck’ that it’s hoping for.

Analyst Bruno Monteyne was quoted in The Telegraph saying he thinks Morrisons is focusing on the wrong performance indicators. This Fool wants to take that further by saying that Morrisons is looking in completely the wrong direction.

Unless management at Morrisons significantly re-structures the business, it will not be able to compete on price, let alone being able to nab the extra shoppers it wants. Given it doesn’t have the scale to compete with Tesco, this Fool believes the high end of the market is the best way for Morrisons to push forward.

The outlook isn’t encouraging

As it stands the majority of City Analysts have either a hold or sell recommendation for the stock. Revenue at Morrisons supermarkets is expected to remain flat while first half earnings in 2015 are expected to fall — I suspect that’s largely because analysts doubt the supermarket chain’s ability to significantly bring down costs. Analysts are also expecting the dividend to fall by close to 4%.

I don’t believe Morrisons has gone too far down the wrong path, but if it continues to chase shoppers currently spending time Aldi and Lidl, I fear it’s heading for a big disappointment.

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David Taylor has no position in any shares mentioned. The Motley Fool UK owns shares in 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.