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Morrisons' new boss faces a tough challenge say City analysts

Published:  12 March, 2015

Morrison's results were broadly in line with expectations, City analysts agreed - but incoming chief executive David Potts faces a tough year.

Joshua Raymond, chief global strategist at said the 52% fall in profits was broadly in line with expectations and there were no negative surprises in the retailers' annual results - but the road ahead would be tough for its new chief executive.

"This does represent a third year of consecutive declines in profits and clearly the supermarket firm has not turned the corner yet," he said. Wheher the firm's £1bn spend to aggressively drive price cuts in the face of competition from the discounters and its rivals was starting to have an impact remained to be seen, he said, but the £1,3bn hit to its property valuation was a surprise, even given market trends. 

Clive Black and Darren Shirley of Shore Capital said the year had been "tumultuous" for the retailer, with some of the deepest contraction in like-for-like (LFL) sales ever seen from a mass-market supermarket.

David Potts Morrisons CEOMorrisons CEO David Potts

But they argued last year's strategic change of direction had been the right approach, although it had lacked intensity, pace and consistency in its implementation. The imminent arrival of new chief executive David Potts was likely to give this impetus to drive the strategy forward, they said. "In David Potts we believe that intensity, pace and consistency will be delivered," said Black and Shirley in a report from Shore Capital.

The interim results in September were likely to provide more colour as to Morrison's evolving strategy, they said, as today's results were essentially "a stepping stone between two regimes". Potts had very favourable two-year comparatives with which to drive necessary top-line progress in the group, they noted.

They also welcomed the retailers decision to reduce its dividend payouts to shareholders in 2016. Although the retailer is honouring its final dividend payment of 9.62p, with pre-tax profits down 52%, it stated the full pay-out will be no less than 5p per share in 2016.


"We believe that this is a sensible course of decision-making by the Board, so assisting the de-leveraging process and providing resource for David Potts," they wrote.

Rayond agreed, noting it was a "clear signal" that shareholders shouldn't be expected a dividend payment around the same 13p levels it received this last year. "It is much more appropriate for the firm to keep cash flow spare when it needs it and not commit too early to a large return to shareholders when the underlying picture remains volatile."

The total dividend +5% from 13p to 13.65p.

A leading retail expert today warned that supermarkets should come to expect low margins as the 'new normal' in today's cut-throat shopping landscape.

Professor Heiner Evanschitzky, professor and chair of marketing at Aston Business School, said Morrisons profit was unsurprising given their campaign of "price-slashing", but the drop is sales was worrying. "It's fair to say that their strategy of price-slashing has failed. This is a clear example of how not to save a supermarket brand," he said.

He warned that supermarkets would have to adapt and urged the big four to "shrink their businesses gracefully" by taking inspiration outside the grocery market.  

"The discount retailers like Aldi and Lidl have fundamentally disrupted the market and the Big Four - Tesco, Morrisons, Asda and Sainsburys - must accept their losing market share," he insisted. "Retailers need to look back at history and see how other businesses managed to shrink profitably - or failed in doing so. Look at former state-run monopolies like BT or even banks like RBS that have been forced to shrink. There are important lessons to be learned that supermarkets must take on board."