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What is Dave Potts' strategy for Morrisons?

After a year in the job, the Morrisons CEO has returned the business to profit, but its recovery will take a long time.

by Adam Gale
Last Updated: 19 Apr 2016

Morrisons was always going to be a tough gig. Late into both online and convenience and concentrated in the price-conscious North, it has been in many respects the most exposed of the Big Four grocers to the disruptive rise of Aldi and Lidl.

Ex-Tesco exec Dave Potts has been in the top job there for nearly a year now, having taken over from Dalton ‘exotic vegetable mister' Phillips in early 2015. Ever since, investors have been waiting to see what he’d do to rescue the supermarket from its seemingly inevitable decline.

At first glance, Potts’ strategy is a fairly conventional three-point turnaround – ‘fix, rebuild and grow’. But trimming back the management speak foliage, what does that actually involve, and how has it played out so far?

Convenience is out

One of Potts’ most controversial moves was to sound an all-out retreat from the convenience business. Morrisons sold its 140 M Local stores towards the end of last year. The supermarket made a £34m loss on the sale, which went against the received wisdom that shoppers were deserting out-of-town hyperstores in favour of the express option. But then M Local wasn’t really working all that well - all Potts did was cut Morrisons’ losses in order to focus on the core business. In many respects it was better to get that out the way early rather than dragging it out at greater cost. 

Slash and burn

Losses aren’t the only thing Potts has cut. He’s continued Phillips’ plan to slash £1bn in costs between 2014/5 and 2016/7. An impressive £423m was saved last year, with a further £350m due in the year to come. One way Potts has achieved this is by axing 800 head office staff, including five directors, and chucking away all of the Phillips-era vegetable misters. (They will be sadly missed by the store's many African cucumber enthusiasts.)

The point of all this of course is to make the most important cut of all, to prices. This is not so much strategy as necessity. Potts has little other option if he wants to resist the onslaught of Aldi and Lidl. Where he has differed from his predecessor, however, is a strong emphasis on simpler pricing – deals and price matching are out, low low prices are in.    

Hello diversification

Potts wants Morrisons to be a ‘broader, stronger business’. What does this mean? His most decisive move has been to become a fresh food wholesaler on Amazon, which could transform Morrisons from a bit player on the online grocery scene to something much more substantial. But he’s also made deals for concessions within Morrisons stores for shoe repairer Timpsons and announced Morrisons franchise concessions within Motor Fuel Group service stations.

All in all, Potts expects that the combination of these moves with lower interest costs could create £50m-£100m in incremental underlying tax before profit.

Bye bye divi

That will come in handy in shoring up Morrisons’ balance sheet, which is traditionally regarded as one of its strengths. It took a £1.3bn impairment on its properties in 2014/5, but was spared the same fate last year, which is largely why it was able to return to profit – before taxes, it made £217m in 2015/6 compared to a £792m loss the year before.

But Potts has recognised that if Morrisons wants to be able to prosper in the future, it needs to do something about its net debt. He cut it by £594m last year, to £1.7bn, and intends to get it down to £1.4bn-£1.5bn by the end of 2016/7.

Property disposals will only get it so far. Potts today proposed a 5p dividend for the full year (including the interim dividend), compared to 13.65p the year before, which will save roughly £200m.  

Is it working?

The general idea has been to arrest the slide in market share through price cutting, while starting the process of differentiating Morrisons from its rivals, largely by virtue of its unique vertically integrated structure.

Despite margin-gutting price deflation of 3% in the last quarter, there are signs that the first part of that strategy is working . Like-for-like sales, which were down 2% for the year, actually rose by 0.1% in the three months to January 31. But for Potts’ leadership of Morrisons to be a success, he will need to make it somewhere shoppers actually want to go. He’s trying, but he will need more time. The question is, how long will Morrisons’ newly impecunious shareholders give him? 

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