Value Push Aids Morrisons Performance

Profit before tax was £309m, including £6m of gains from property disposals (2007:£17m). Underlying profit before tax was £295m, compared to £249m in the equivalent prior period, an increase of 18.5%.

11/09/08 UK retailer Morrisons has said that total turnover for the 26 weeks ended 3 August 2008 was £7.1bn, up 13.5% (including fuel) on the equivalent 26 week prior period. Like for like turnover excluding fuel was up 7.6% with a further 1.6% contribution from new stores.

Profit before tax was £309m, including £6m of gains from property disposals (2007:£17m). Underlying profit before tax was £295m, compared to £249m in the equivalent prior period, an increase of 18.5%. The operating margin of 4.4% was in line with the prior year, a strong result given the dilutive impact of low margin fuel sales.

Morrisons said that the consumer environment in the first half of 2008 was the worst for many years, with disposable incomes dropping significantly as a result of the tightening of credit availability and increases in energy, commodity and other household costs. In the grocery market, consumers experienced food price inflation on basic items, although intense competition in the sector ensured that underlying producer cost increases were not passed fully into retail prices.

The extent of input cost pressures can be illustrated very simply through the commodity markets. At 31 July 2008, the market prices of some basic raw materials compared with one year previously were up as follows: crude oil 66%, wheat 23%, rice 119%, beef 27% and lamb 32%.

During the period the slowdown in the economy inevitably led to a strong focus on value. While Morrison’s premium ranges and fresh food continued to show good growth, the retailer also placed stronger emphasis on our value ranges, which were relaunched, and the promotions for which Morrisons is renowned. A number of hard-hitting deals were offered, including a series of discounts through the Sun newspaper and a basket of everyday fresh products at 50 pence each, a heavy discount to normal retail prices. The latter promotion was well supported by our manufacturing businesses, which were able to deliver significant volume increases at very short notice.

The crude oil price feeds directly into pump prices, but also indirectly into the costs of packaging, food distribution and energy, the company noted. Wheat and grain costs impact directly bread and bakery prices and indirectly livestock prices through the cost of animal feeds. The intense cost pressures seen early in 2008 showed some signs of easing later in the period, with oil and wheat down 15% and 39% from their respective highs. Further reductions in other commodities will be required for the inflationary pressure to ease in 2009.

A number of measures of grocery market performance are published, all of which are broadly consistent. One such, from Taylor Nelson Sofres, showed grocery market growth in the first half of 2008 at 6.1%, compared with growth in the equivalent prior year period of 4.7%. Whilst the 2008 performance is in the context of a very difficult economic backdrop and the inflationary pressures described, 2007 also had its difficulties, with very poor summer weather and two bouts of flooding.

Morrison said that in their Optimisation Plan, they have targeted to grow annual like for like sales ahead of the market overall. “The momentum of the first half year has set us up well to achieve this for the full year, despite the challenging comparatives as we approach Christmas. The first half profit performance gives us confidence that we will deliver our profit expectations for the year. We fully expect the second half to be highly competitive as disposable incomes come under further pressure, and we will continue to use our sales momentum to fund price investment and maintain a strong competitive position,” the retailer reported.