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
    +1

    Comment number 553.

    The only supermarket in my town centre is a Morrisons. A lot of its problems are of its own making, not the general issues about the discounters and the internet. Its stock control is abysmal, being the only supermarket I have ever experienced that frequently runs out of milk. I sped less there because it can't be relied on to have the products I want on the shelves.

  • rate this
    0

    Comment number 552.

    Again this goes back to the times of success which were in reality times of excess where for the supermarkets the customer did not matter.

    Now as wage deflation coupled to consumer indebtedness bites the customer has perversely become king once again.

    It all goes back to what is on offer in the store: price and quality! Time to close the head office and invest in the front line.

  • rate this
    0

    Comment number 551.

    Morrisons problems are rooted in their takeover of Safeway in 2004 that suited the City. Southern customers preferred the Safeway brand. Sales increases from refits soon ran out of steam. Blaming troubles on discounters who have been around for more than 20 years is a smokescreen as is the focus on price. UK food customers shop by location first! Price isn't the biggest factor for most.

  • rate this
    0

    Comment number 550.

    In the past Morrisons have suffered because they made the wrong decisions. In what way has the management improved to make their next move any better?

    I'd suggest that the other supermarkets will not be guided by Morrisons decisions now any more than they were before.

    Price is not the only factor influencing consumers' choice of shop especially with regard to food.

  • rate this
    0

    Comment number 549.

    That'll be the WageDeflation cutting profit margins.

  • rate this
    0

    Comment number 548.

    Consumers have been buying too too much recently.

    So much is simply not eaten - rather it is thrown away.

    Combine that with the race to the bottom and what have you got?
    Rock bottom wages and service from stores that service folk with not much money.

    And overpriced emporias shortly to have no customers.

    Tighten your belts you will look fitter.
    Until your legs drop off that is...

  • rate this
    0

    Comment number 547.

    Supermarkets, I told you your sales would fall when you got involved in the phoney war on carrier bags, but you didn`t listen.

  • rate this
    +1

    Comment number 546.

    Robert

    We, as customers, do not really care about more or less profits they (the UK supermarkets) made, this is not the point.

    Look forward to seeing your new article namely:

    How did the UK supermarkets fool their customers?

  • rate this
    -3

    Comment number 545.

    Double the £10k tax threshold. People will spend it. Lamont is an idiot, Lawson didn't do that well either. People need pennies in their pockets to spend at Morrisons.

    In that vein, it is time to levy VAT on borrowing. There can be exclusions for all sorts, such as first time property buyers.

    This, entirely sorts revenue, is as sensible as falling off a log, and makes people think about money

  • rate this
    -2

    Comment number 544.

    Sainsbury's is eye-wateringly expensive these days (the independent price comparisons show it, it's not just my perception). The Brand Match thing is a scam because (a) few people of normal income live on branded goods and (b) we ONLY normally buy them when they're discounted, which is how Sainsbury's can then tell us we've saved £3.50 at the checkout.

  • rate this
    0

    Comment number 543.

    Being totally honest I actually like shopping at our local branch of Morrisons. Its based in a nice area, so there are a better class of customers, the staff always come across as happy to help and being honest Heinz tomato ketchup is the same item no matter if you buy from Morrisons, Tesco or wherever.

  • rate this
    -3

    Comment number 542.

    The days of the big family shop at the supermarket are clearly numbered:
    This will all be done on-line and delivered with just fresh and convenience products purchased in store

  • rate this
    0

    Comment number 541.

    Morrisons need to decide who they need to compete against. The likes of M&S and Waitrose are out of the equation, so do they take on Asda, Sainsburys and Tesco in a price war which those three will respond to and the result will I fear not help Morrisons or do they try to upset the growth of Aldi & Lidl.

  • rate this
    0

    Comment number 540.

    @528
    "Surely if they are all about to embark on a price war , it's an admission that they are already charging too much"

    The economy recieved a boost from Banks PPI pay outs but once that ends it's belly up again. Below inflation pay rises means customers have ever decreasing disposable income. Greater competition for a slice of a smaller pie has caused this price war.

  • rate this
    0

    Comment number 539.

    Slightly off topic; My frequent experiences of using my main supermarket brand is, when I purchase online: I only ever receive about 80% of order through being out of stock of essential items, and when I go to the store locally, the shelves are empty, through everything remaining unpacked in their stock room.

  • rate this
    0

    Comment number 538.

    Aldi & Lidl would be better described as undercutters than discounters
    they don't offer discounts (for the most part) they offer similar alternative products at a price that usually undercuts the norm

    Supermarkets such as Morrisons & Tesco are discounters, they use discount offers to attract new custom

    M&S and Waitrose are posh nosh

    Farm Foods Iceland etc & nowdays Asda are cheap & cheerful

  • rate this
    0

    Comment number 537.

    you remember when he government said they would have to bring in austerity measures to bail the banks out?

    which bit didn't you get?

  • rate this
    +4

    Comment number 536.

    Not all that glitters is gold. My wife recently did a shop as she has done many times before for an elderly friend. Being short on time she called into a local Lidl and bought the essentials and was amazed to see that the bill was in fact slightly more than what she would normally pay in Tesco's. This was a shock as my wife had thought that with the hype it would have been considerably lower.

  • rate this
    -1

    Comment number 535.

    having shopped at Lidl and Aldi for 7 years in various countries I am always struck how more productive the staff are, I.e faster checkout, and when they are not serving customers they are stacking shelves. Compare this with staff in other supermarkets who seem to be sitting around chatting most of the time

  • rate this
    0

    Comment number 534.

    One word to describe all the UK supermarkets - terrible

    Poor brits, miserable

 

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