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Challenge facing new CEO

Morrisons suffers eight year low with slump in profits

MorrisonsMorrisons supermarkets unveiled its worst performance in eight years with profits plunging by half as it became the biggest casualty among the big four of a price war with the discounters.

Underlying pretax profit fell 52% to £345 million in the year to 1 February and is the third consecutive year of falling profits. The bottom line loss, including impairments, increased to £792m.

Incoming chief executive Dave Potts, who replaces Dalton Phillips, will carry out a review of operations and provide a more detailed statement.

Company chairman Andrew Higginson acknowledged that customers identified price as their priority.

He said: “We will invest more into the proposition and put customers at the heart of everything we do. We will listen and respond to our customers, and work hard every day to improve the shopping trip.

“Success measures will be simple – more customers buying more from us. More customers means more volume growth which, ultimately, will lead to better like-for-like, profitability and shareholder returns.”

The company, which has struggled to compete with its three bigger rivals and with the discount chains Aldi and Lidl, has shown its commitment to shareholders by proposing a final dividend of 9.62p, making 13.65p for the full year, up 5%.

However, it said future payouts would be lower, guiding to a dividend of not less than 5p per share for 2015-16.

The firm also said it would invest more in cutting prices in the current year and slow down the opening of convenience stores.

Phil Dorrell, director of retail consultants, Retail Remedy, said: “This is a rout, not a reversal. With the most dated stores and weakest business strategy of the old guard grocers, Morrisons has truly been put to the sword by the rise of Aldi and Lidl.

“The brand has haemorrhaged both sales and share to the brash young discounters who took its cheap prices USP, improved it, and then unceremoniously yanked the rug from underneath it. Next to the perky German upstarts it has increasingly looked neither cheap nor cheerful.

“Despite a modest pick up over Christmas, 2014 was a truly awful year for Morrisons – with annual pre-tax losses quadrupling to nearly £800m.

“The brand’s property portfolio is one of its few ‘get out of jail’ cards – and the £131m profit it made from dumping property assets was a rare bright point in a truly awful set of results.

“The new CEO David Potts, who starts on Monday, has a mountain to climb. He is a well-respected figure, and his pragmatic and detailed approach should challenge both the buying teams and the store teams to re-awaken the spirit of Morrisons, hopefully with a modern twist.

“Despite its multiple problems, Morrisons remains a solid business – or at least it would be if it could get its offer right. It needs an overhaul to convince people it is attractive again.

“The marketing over the last few years has been dire, and has done nothing to change its tired public image. The brand needs to be much bolder if it is to recapture the distinctive market niche that it created and then lost.”

One retail expert has 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, says:

“Supermarkets have to get used to this ‘new normal’ of low profit margins and must adapt accordingly. 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.”

Professor Evanschitzky urges the Big Four supermarkets to close their least profitable stores. “The best option for them now is to shrink their businesses gracefully.

“News that Morrisons’ profits have sunk is unsurprising after their campaign of price-slashing. More worrying is the fact that sales have dropped – something you would hope to avoid when slashing prices. 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.

“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.”

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