Morrisons and the threat to mainstream supermarkets

 
Morrison

Although the scale of what's gone wrong at Wm Morrison is unusual, its woes highlight challenges faced by all mainstream supermarket groups.

A couple stand out for me:

  1. The challenge of the so-called hard discounters, Aldi and Lidl;
  2. The impact of the migration of business online.

First it is worth noting just how far and fast Morrison has fallen. What it calls underlying profits was £901m two years ago. That fell to £785m last year, and it is forecast to be between £325m and £375 in the current year.

Or to put it another way, Morrison's profitability has crumbled almost two-thirds over three years.

Some of that is cyclical, the result of a squeeze on customers' living standards.

Much of it is secular, a permanent migration to cheaper rivals, and a shift in spending habits to local convenience stores and online shopping.

Only now is Morrison responding to what it sees as these permanent changes, by belatedly establishing convenience stores, forming a joint venture with Ocado in online shopping, and by what it calls a "reset" of "the profit base", in order to offer "best value, price and quality for customers".

In other words, it is reconciled to squeezing its profit margins, or to making less profit per customer, to try and fight back against the aggressive competition from Aldi and Lidl.

Start Quote

Online is changing the economics of supermarkets in a fundamental way - and in a way that does not bode all that well for conventional stores”

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So, some of Morrison's woes are sui generis, a failure to make the right investments in IT and property over the past decade.

But some are relevant to all supermarkets.

Or, if Morrison is cutting profit margins in a significant way, won't its mainstream rivals Tesco, Sainsbury and Asda have to do something similar?

And another thing. Online is changing the economics of supermarkets in a fundamental way - and in a way that does not bode all that well for conventional stores.

The simple point is that the costs of selling from a store are relatively fixed, in the form of wages and rent, so additional sales from a store generate progressively bigger profits.

And the reverse is true. When sales fall in a store, profits will fall faster than those sales, because (to repeat) so many of the costs are set in stone.

So a big investment in online, of the sort that Morrison is doing, can undermine the profitability of stores in a fundamental way, by cannibalising sales.

Which would not matter if the intrinsic profitability of online was massively greater than for sales from stores.

But published results of Ocado don't exactly demonstrate that. And what's more, Morrison is sharing whatever profits it succeeds in generating online with Ocado.

All of which is to say (as if you didn't know) that there is something of a revolution going on in food retailing. And that revolution probably benefits us, shoppers, by delivering deflation in what we buy and more choice in how we buy.

But for the giant supermarket chains we traditionally regarded as fearsome and invincible, there's a threat which - if not quite existential - is pretty serious.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +5

    Comment number 33.

    Food inflation has been running much higher than admitted. Supermarkets have been trying to keep a lid on price rises but the cracks are now beginning to show.

  • rate this
    +26

    Comment number 32.

    I am not sure it is fair to describe Lidl and Aldi as aggressive competitors. They seem to offer value for money, good products at a fair price, and have few gimmicks. Lidl, for example, offer only 2 half price reductions per week, rather than these two for one deals which take up so much landfill. And if I were Greggs I would also be worried about their bakery products as they are really nice.

  • rate this
    0

    Comment number 31.

    Shopping in Aldi and Lidll means I go in, add up prices as I go round shopping and know what I've spent when I leave.
    Shopping in British supermarkets means before going I have to sort out loyalty vouchers and take a calculator to work out different offers - if I want to eat the same thing for 6 days on the trot. After shopping I then need to sit at a computer to work out my loyalty points.

  • rate this
    0

    Comment number 30.

    Morrisons won't succeed, depending on how attractive Morrison’s locations are to their rivals, it might be a good takeover target.

  • rate this
    0

    Comment number 29.

    " some of Morrisons' woes are 'sui generis' " For those of us whose first language is not Latin,why cannot Robert Peston - bless him - simply say " of its own making " or " peculiar to itself " ?

  • rate this
    +6

    Comment number 28.

    I now use Aldi and Lidl almost exclusively. Their prices might be cheap but the quality isn't.

    True...choice is relatively limited. But it is still more than enough for someone like me who knows (roughly) how to cook!!

  • rate this
    +1

    Comment number 27.

    I have so many supermarkets in a couple of miles and with free car parks (which are essential to pick up the shopping!) that I constantly expect the local population to burst through over indulgence. (The domestic food recycling bins are also very full each week.)

    Every chain is represented. Yet we can only consume so much. The trade has to produce losers - viz Morrison's! It is normal!

  • rate this
    +3

    Comment number 26.

    Sadly, it has been a poor supermarket. Its biggest problem is its marketing department which seems to be run by a committee that cannot agree. Lines come and go, prices rise and fall on the same items week-by-week so shopping becomes a gamble and that is no way to keep customers. Add into that zero Internet presence, poor management and lousy stock and it is why people stop using it. We did.

  • rate this
    +4

    Comment number 25.

    If Morrisons were a premier league team they'd have sacked their manager Dalton Philips a year ago.

    They were, under the ownership of the Morrison family, the best of the big supermarkets, with a 1st class fresh food offer, at reasonable prices.

    Since the family sold out the business it has totally lost its way. my weekly shop with them has fallen 30% over the last 2 years as a result.

  • rate this
    +2

    Comment number 24.

    I have few local options, Sainsbury's, Tesco and the Co-Op. No competition and prices rise far faster than inflation. Even worse some basics they only stock in expensive tines. I looked on line in Amazon and there the basic's were! So now I have to choose between a supermarket and Amazon! Stores need to stop thinking everyone want's own brand and offer a variety. I'm off to check Amazon for Bisto!

  • rate this
    +2

    Comment number 23.

    The facts are that we have had it too good for too long with (some) very cheap food. Prices have now risen dramatically ie £3 for a small box of Kellog's cereal. Highlight items such as milk etc mask just how high supermarket prices have risen. Aldi and Lidl have their place an indeed their fresh veg is excellent and if you have the time and inclination there are savings to be made.

  • rate this
    +64

    Comment number 22.

    It's not as though Aldi & Lidl have only just appeared on the high street.
    They have been here for about 20 years. What has been the game changer is the depression. People have had to shop at these cheaper shops but having done so have realised that not only is the stuff cheaper but in many cases better quality than the fare at Tesco Asda Sainsbury's. The big supermarkets are all in decline now.

  • rate this
    +3

    Comment number 21.

    Morrison has come late to the online party and they will find there are no shortcuts to making it profitable. I am not sure partnering with Ocado is a quick fix or a long term drag on profits but if they can leverage their own advantages for joint benefit (Ocado expertise + Morrisons logistics) it could be a good decision. But are their natural customer a typical online food shopper? Maybe not.

  • rate this
    +1

    Comment number 20.

    To say it benefits shoppers (probably) by deflation (ie cheaper prices) is to imply that the only thing that effects our lives is prices. This is classic economic nonsense. Economics fails when it think that price is the only value in life. What about community life, meeting people in shops, being know by your name, proximity to shops... please account for these things in your analysis Robert.

  • rate this
    0

    Comment number 19.

    Imagine what may happen if Amazon gets into the grocery business?

  • rate this
    +7

    Comment number 18.

    Morrisons is out of date and needs a significant cultural shift in order to be successful. Processes are slow and painful (15 mins to get a refund on a pricing error the other day), little online presence, high prices on many items. They seem to have sat and watched while the rest get on with it, with this new strategy they might end up as a friend of no one lost in the middle.

  • rate this
    +16

    Comment number 17.

    10.Cooluwahed
    Why are Aldi and Lidl referred to as "discounters
    ----
    It is all about perception. Aldi and Lidl tend to package their own brands with various differing trademarks so they appear as equivalents of established brands like Kellogg and Heinz. They also specialise in buying cheaply slow moving stock from manufacturers who are seeking to clear warehouses for new, or improved, products.

  • rate this
    +3

    Comment number 16.

    Morrisons is underrated by consumers.Once Tesco looked smart with fresh produce and Morrisons looked dowdy, but the reverse is now true as Tesco has cut costs. Walk into Morrisons to see fresh veg offered in a cool mist, while Tesco has empty racks with a few stale items the managers want rid of before the fresh stuff is put out. And their Miles Card fuel loyalty scheme is simple and excellent

  • rate this
    +8

    Comment number 15.

    Shoppers are begining to realise the con of what the big 3 offer ... Aldi don't offer BOGOF or have the multi buy offers. just good quality & value without trying to pull the wool over the consumers eyes

  • rate this
    +6

    Comment number 14.

    As a full time carer I use supermarket visits as a brief break in routine, spending around £6,000 pa.Morrison closest branch is geographically further than Liddle and I have continued to use it. However, over the last year I have experienced- Poor re-stock levels, diminution in range, longer checkout queues lack of staff to answer inquiries and some of those met by a shrug or inability to answer.

 

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