Profits Down 50% At Morrisons On Weaker Sales And Inflationary Pressures

 Namnews, 29th September 2022

Morrisons has reported a halving of third-quarter profits as it lost sales to the discounters and faced “unprecedented inflationary pressures” in its food manufacturing operations.

The retailer, which was recently overtaken by Aldi as the UK’s fourth biggest supermarket chain by market share, saw its EBITDA fall from £356m to £177m over the 13-week period to 31 July.

Morrisons noted that “as a foodmaker, we feel the effects of inflation earlier than other retailers”. The group produces around half of its fresh food in-house, a much higher figure than other supermarkets.

Morrisons also stressed that some of the decline was due to “temporary and transitional factors” such as alterations to the group’s loyalty scheme. A change in its financial year-end from January to October following its takeover by CD&R last year also meant that profitable income from supplier advertising and promotions now falls in the fourth quarter, not the third.

Excluding fuel, the grocer’s like-for-like sales fell 3.1% as more competitively priced chains tempted cash-strapped shoppers to their stores. However, Morrisons noted that the figure was an improvement on the 6.4% decline seen in the previous quarter, with an increase of 4.8% compared to before the pandemic. The group’s total sales also rose 4.5% to £4.79bn after it benefitted from higher fuel prices.

“It’s clear that the cost of living crisis is starting to change customer shopping patterns in many ways,” said Chief Executive David Potts.

“The speed, scale and severity of cost and energy price increases, exacerbated by the terrible war in Ukraine, had significant impacts through the quarter, but the market is still growing, and the energy price guarantee will ease pressure on consumers.”

The company stated that it had exited the period in a stronger position, with “good momentum” that it expects to continue into the fourth quarter.

In recent months, the business has been losing sales to the discounters and supermarket rivals as trading conditions worsened. Surveys have suggested that prices at Morrisons have become more expensive compared to its competitors in recent months, weakening its performance. It began its fight back this week, announcing that it was investing over £100m in price cuts across 150 of its most purchased products.

“We are doing everything we can to keep prices down for customers”, said Potts yesterday.

“Importantly, we are adjusting and adapting, with ongoing investment in our customer proposition including exciting plans for McColl’s, which we’re confident will continue to grow our convenience offering and footprint. We are also improving our digital capabilities and investing strongly in our My Morrisons card and app, helping us to incentivise and reward our customers in a more personalised and targeted way.”

NAM Implications:

• Joining an Aldi dot: ‘Aldi willing to take big hit to profitability to grow share…’
• …to a possible Lidl response: ‘sacrifice UK profit for share’.
• Add the impact of a 5-6% interest rate to highly leveraged Asda & Morrisons’ current pressures…
• …resulting in the probable smell of toast burning…
• Meanwhile, PE owners involvement will see asset sale as source of cash and a simplification of the retail business model.
• Whilst awaiting results from recent trading initiatives.
• i.e. Watch for a possible sale of manufacturing…
• …as a possible opportunity for suppliers in relevant categories.