The Nightmare Scenario - Could Morrisons be Broken up and Sold Off, Leaving Just Three Big Supermarkets?

It was just a small piece in the Times this morning but it should send a chill through every one who supplies supermarkets.

The piece suggested that troubled Morrisons was being closely examined by private equity firms with a view to being bought and broken up, thereby generating mountains of quick, easy cash.

The writer went on to say that Sainsbury would love to get their hands on the 100 convenience stores that Morrisons have developed, because it would help them better compete with Tesco, and that ASDA might like to buy the superstores.

It is just speculation of course. There would probably be competition issues, given that the combined share of Morrisons and ASDA would be around 27%.

But the thought of there being only three big players in the UK grocery marketplace is alarming to put it mildly. Pressure on suppliers is tough enough with 4 major companies vying for sales and profit.

And Morrisons, the latest decision to stock New Zealand lamb during the winter apart, is a strong supporter of British farming, especially livestock.  Speaking as a farmer supplier to Morrisons I can say that they are fair and efficient too.

Morrisons will survive if they concentrate on what made them successful in the first place - selling top quality fresh food at prices cheaper than the competition. They are uniquely placed to do this because they own their own abattoirs, fruit and veg packing houses, and  bakery. Their commitment to reducing prices by £1billion is a first step towards a recovery, but given that their competitors will follow them down in price, it is to be hoped that the cost benefit of vertical integration means that Morrisons ultimately will win a pricing war.

Less easy to call is whether their new emphasis on convenience and online shopping risks taking their eye off the main ball which is getting core customers back into the stores.

Anyway, such decisions are down to Dalton Phillips, the man in charge of Morrisons. Every supplier to supermarkets should be keeping everything crossed that he sorts out a recovery strategy soon, and sees off any attempt from private equity firms to buy the business.

The Increasingly Complex Consumer

It is becoming harder to work out what is going through the consumers mind as they do their food shopping.

On the one hand we could conclude that all roads lead to lower prices.

The growth of  discounters ALDI and Lidl with sales up 30% and 13% respectively versus prior year, has forced the big 4 retailers to re-evaluate their strategies. Morrisons who are the worst hit of all have led the way, declaring that they will drop prices by £1 billion over the next three years to help them compete. Where Morrisons led, others were swift to follow particularly Tesco and ASDA, the former also struggling to grow sales, and the latter keen to preserve their position of always being 10% cheaper. Indeed, like lemmings hurling themselves over the cliff, the race to the bottom has started with all the major retailers dropping the price of milk, bread and eggs.

 

It is not just the Aldi Lidl phenomenon that is leading to change. The last few years have seen the rise of the disciplined shopper who sticks rigorously to a pre-planned list. 48% did so in 2008, the figure is 67% in 2013.(Bord Bia) As a result, the amount that the shopper spends per trip has dropped. Retailers have responded with  heavy, value orientated promotions, but have not found the magic growth formula. Indeed, in the last 12 weeks, grocery growth was 2.2%, just 0.3% ahead of inflation.(Kantar worldpanel)

As to the future, work done by IGD suggests that consumer confidence is increasing, but feeling better is not encouraging people to slacken the purse strings. When asked about their priorities for 2014, 64% said it was about saving money, 47% wanted to reduce food waste to save money, and 47% were determined to stick to a budget.

So maybe the lemming rush to slash prices is indeed the right answer.

And yet.....

We hear that premium food ranges are growing faster than value ranges. Tesco’s Finest range is growing by 12%, and Sainsbury’s Taste the Difference by 9%. (Worldpanel/NFU conference)

Waitrose, not known for being cheap, is showing year on year growth and now has 5% of the total market, its highest ever share.

Sales of organic produce have returned to growth, up 2.8%.(Soil Association). Organic milk is enjoying a mini boom, up 9% in value and 7% in litres. (Dairycodatum).

RSPCA Freedom Food higher welfare products have been bought by 52% of shoppers.

So what are we to conclude?

First, the price issue cannot be ducked. Not only are consumers committed to finding low prices, they have, in their phones, tablets and computes an easy way of checking that they are indeed buying a particular item at the lowest price. However, with all the grocers selling products at the same price, it is becoming less of a reason to choose one store over another.

However, people are prepared to spend on what they value – that hard to define combination of what benefits a product offers and a feeling in the consumers mind that these benefits are worth paying for.

Knowing what the consumer wants and providing it effectively remains at the heart of a successful business strategy.

Coop Farms Deemed Non Core - A Strange Conclusion in a Food Business

How disappointing to hear that the Coop has decided to sell its 15 farms after owning them since 1896. As their web site says –“nothing makes better sense than for the Co-operative to produce our own food for our own stores.” And there will have been many consumers who believed this and saw it as a reason to shop at the Coop.

Yet, dig a bit deeper and it is clear that the farms business, like every other aspect of the Coop has been run in an ad hoc, un-strategic and ultimately disastrous fashion.

It turns out that of the 49,000 acres under Coop management, just one third is owned, and the remainder is on let land or contract farming arrangements.

And, far from fulfilling the promise on the Coop website to use Coop produce in Coop stores, it turns out, according to Chief Executive Euan Sutherland, that only 2-3% of production goes to its own stores, mainly potatoes. Some 70% of production is in cereals, mostly sold to other companies.

Despite ownership of such vast quantities of land, the Coop farms none of its own livestock. It was in dairying but came out in 2003 to concentrate on arable products.

The trends towards buying local, worrying about provenance and buying British has been evident since the early 2000’s. The Coop was clearly aware of this, hence the blurb on the website, yet lacked the will or the sense to utilise their precious farming asset to take advantage of the trends. Indeed, the Coop could be accused of blatantly misleading consumers.

Anyway, the farms will go. Apparently they will raise about £140m which will help to pay down debt.

So what of the Coop food business now? It has been losing market share for years. The new head of food, ex Tesco executive Steve Murrells said in an interview last week “Our stores were, frankly, awful”. His answer is to streamline the range of goods offered, open more smaller stores to take advantage of the growth in convenience shopping, and test out selling online.

That will not in itself be enough to save the business. Tesco and Sainsbury have been investing in convenience and online for years, and Morrisons is running hard to catch up. The Coop has no obvious point of difference in their offer to attract consumers from the big players.

Yet in the farms it could have had a powerful differentiator. In today’s climate of increasing worry about where food comes from, animal welfare and ethical production considerations, what could be more compelling than knowing that the place you shop at has managed the production of the food it sells all the way from farm to shop shelf.

But of course it is too late now. It looks like the Coop is throwing away what could have been a competitive point of difference in an increasingly cut throat grocery world.