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, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +4

    Comment number 73.

    Interesting how the german supermarkets such as Lidl and Aldi can make it over here, wonder how the likes of Tesco and Morrisons would fare in Germany. !!!

  • rate this
    -3

    Comment number 72.

    I now have no loyalty to any particular supermarket - I'll happily shop at Sainsburys, Waitrose or Aldi.

    Tescos is just depressing to shop at - the staff are poorly treated by management so always look grumpy. Plus their burgers are full of mashed up bit of horse.

  • rate this
    +2

    Comment number 71.

    Of course they cant compete with corporations like Aldi and Lidl that don't pay corporation tax!

    And the same discount supermarkets sell rip-off products that imitate the named brands (even copying the packaging), made in some eastern European factory where they probably don't follow EU regulations.

    Buy British.

  • rate this
    +3

    Comment number 70.

    Why are so many people jumping over themselves to knock Morrisons, Tesco, etc and praise the likes of Aldi & Lidl. Morrisons are a home grown British business, employing thousands of British workers and paying millions in British taxes. They often source local produce and place an emphasis on supporting the local community.
    Who wants a high street of poundshops, junk shops and Aldi's ?

  • rate this
    +4

    Comment number 69.

    In most business models there are two ways to prosperity: low price, low margins, good value or high price, high margins and premium quality. The first makes money by high turnover and the second by attracting higher margins on a low turnover. Anyone competing between these models risks customers moving to higher quality or to lower prices (or both), especially during a downturn.

  • rate this
    +3

    Comment number 68.

    I used to shop in Morrisons but they have steadily put up their prices to a point where I now shop elsewhere! If I am prepared to pay Morrison prices I may as well go to Marks and Spencer for better quality products. Asda now seems me quite a lot with the odd visit to Tesco. Sorry Morrisons but you are pricing yourself too high!

  • rate this
    0

    Comment number 67.

    Just compare Morrisons and Tesos to the other supermarkets. Poor quality own brands, expensive brands, myriad of rip off BOGOFs,. Aisles filled with promotional baskets blocking your way. Queues at checkouts. Its no wonder these two ripoff companies have been rumbled. By local, grow your own or go to Aldi and Lidl.

  • rate this
    +2

    Comment number 66.

    After a couple of Saturdays when they had no bread or 1% milk left on the store by 6pm I decided to never come back to Morrisons.

    For me it wasn't price or food quality, it was basic product availability. Plenty of fancy vegetables but some of the essentials missing.

  • rate this
    +5

    Comment number 65.

    This may be the beginning of the end for big supermarkets and good riddance - but they have already succeeded in killing off most of the high street food retailers made enormous profits atour expense, bullied local councils with their false promises and had the advantage of free parking. Bring back the local butcher, baker and candlestick maker. May the rise of farmers markets continue

  • rate this
    +1

    Comment number 64.

    Hmm, all those prime supermarket sites, good access, perfect for housing development. Is Tesco still sitting on development land to freeze out competition? Kill two birds with one stone.

  • rate this
    +3

    Comment number 63.

    As a customer who usually buys food for one and makes frequent visits to Morrisons, a short walk from my home, I am constantly annoyed by multi-buy (or bogoff ) deals on chilled and frozen produce. I have no freezer and usually have the fridge switched off. I suspect that I represent a growing proportion of the market.
    When will a major supermarket simply discount single purchases on these foods?

  • rate this
    +1

    Comment number 62.

    The problem with competing on price is that there is always someone will do it cheaper, so bye bye Kwiksave and Netto.

    Many shoppers still want a wide range of quality goods at reasonable prices with good service which the discounters cannot provide. Morrison needs to refocus it's strategy, simplify its offer and improve its service. As disposable income increases so will its fortunes.

  • rate this
    -4

    Comment number 61.

    Morrisons is not much good, but Aldi and Lidl are even worse!

  • rate this
    +16

    Comment number 60.

    Isn't this meant to happen in a competitive, free-market economy? Initially, companies make large profits - but these are then reduced as new enterprises join the market and compete for the same profits. Prices are lowered, profit margins are shared/taken and costs/efficiency become more important. Major supermarkets should not own a monopoly on the market share, and this forces them to evolve.

  • rate this
    +1

    Comment number 59.

    Morrisons have joined the race to the bottom then.

    Ah well, looks like the Co-op had better become a Waitrose, for those who don't have one.

    They might as well. Their traditional customers don't seem to understand what a co-op is any more.

  • rate this
    +1

    Comment number 58.

    Stop the rip off prices
    If Aldi and Lidl can sell good quality food cheaper why cant the others like Morrisons Tescos Etc.
    To many staff in them standing round looking important

  • rate this
    +3

    Comment number 57.

    38.DylanOnTheMagicRoundabout

    "The major supermarkets could do worse than follow Aldi's lead i.e. provide really good quality fruit and veg and meat and value for money."

    My local Morrisons, one of their new format, does exactly that - good quality fruit, veg, meat, fish. All at better prices than Tesco and the others.

    Not all stores are the same - for any of these retailers.

  • rate this
    +54

    Comment number 56.

    You don't mention Waitrose who are going from strength to strength, so someone is doing something right and with their essential range they are now taking customers away for the likes of Tescos and no bad thing either, as Waitrose take care of their staff and their staff are always, without exception friendly and helpful!

  • rate this
    0

    Comment number 55.

    Only reason to shop at Morrison's is that they are the only supermarket to sell Trooper. Thats all I buy from there

  • rate this
    +5

    Comment number 54.

    What deflation are you talking about?
    In food specially there is no deflation at all or if there is any is for unhealthy burgers made out of horse.

    The food&energy part of the deflation is the one that has been rising significantly above the CPI 2% target for the last years (And much more above wages)...

 

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