One of the few people with reason to feel glad at Morrisons full year results this morning is its incoming boss David Potts. When Potts starts next Monday, at least the bad news will be out the way. Or so he might hope.
Morrisons made an £800m loss in the year to February 1st, four times what it was in 2013. Before you choke on your sandwich, it should be made clear that this was largely the result of a colossal, £1.3bn property impairment, as Morrisons downgraded the value of its considerable portfolio. Its underlying operating profit was £345m, down 52% from last year. Because that’s so much better.
The £1.3bn property write down came as Morrisons attempted to reconcile the values it had on its books with the price it could get if it sold sites. It follows a similar write down by Sainsbury's last year, and could relate to the fact that the only firms interested in buying vast out of town supermarkets (as opposed to just the plots they sit on) are other supermarkets, which are all trying to get rid of them.
New chairman Andrew Higginson was fairly frank about the task facing Potts, his one time colleague at Tesco. ‘Last year’s trading environment was tough and we don’t expect any change this year,’ he said.
Some might call that language diplomatic at best. ‘Morrisons has truly been put to the sword by the rise of Aldi and Lidl,’ said retail consultant Phil Dorrell of Retail Remedy. ‘The brand has haemorrhaged both sales and share to the brash young discounters who took its cheap prices USP, improved it and unceremoniously yanked it from underneath it’.
Potts will inherit a firm that already has a far-reaching strategy in place to deal with this problem. Morrisons is aiming to cut costs by £1bn, and is ‘determined to keep lowering prices’. Indeed, last year no less than £315m was ‘invested in [its] consumer proposition’, a hideous expression meaning it's cutting prices to shore up market share against Aldi and Lidl at the expense of profits.
The firm has also already put the brakes on outgoing boss Dalton Philips’ hasty attempt to catch up with its rivals among the Big Four in the convenience business. It built 57 ‘M’ local stores last year, but had to close six because they weren’t profitable. Following in the footsteps of Tesco's Drastic Dave Lewis, who axed 43 stores in January, Morrisons today announced more closures would follow.
‘We are not seeing the level of trading performance we anticipated’, Morrisons admitted in a statement accompanying its results. ‘We…are informing colleagues today of a proposal to close 23 stores during 2015-6’, it said, adding that it would also ‘slow new store openings significantly’. Indeed, the effects of this retreat are already being felt. Last year, capital expenditure halved to £520m.
It’s a grim task – or an exciting challenge, if you’re the optimistic sort – to take on a business in such a steep decline, but there are a few rays of hope for Potts. Though revenues went down 4.9% to £16.8bn, the decline was greater in fuel sales as a result of the oil price collapse, which should be a one off (unless we do see $20 oil, of course).
More to the point, its fourth quarter like-for-like revenue decline excluding fuel was only 2.6%, compared to 6.3% in the third quarter and 7.6% in the second, meaning perhaps the worst days are behind it. Morrisons’ shares actually rose 0.6% by lunchtime to 207.5p after an initial dip, showing investors were prepared for the bad news. They’ve had long enough to get used to it.