Morrisons’ group property director Terry Hartwell talks to Annabel Dixon about his plan to counter the supermarket chain’s dismal holiday sales results last week with a push towards convenience stores and fresh food online. Photo by Tom Campbell
Any chance of a happy new year for Morrisons evaporated last week.
Last Thursday the supermarket updated the City on its all-important Christmas trading period. It made for tough reading.
Like-for-like sales slid by 5.6% in the six weeks to ?5 January as the group was forced to report that Christmas had been “very challenging, with a slowdown in market growth” and that “difficult market conditions were intensified” by the accelerating importance of the online and convenience channels.
Not a pretty picture. And not conducive to inspiring much-needed confidence in a group trying to reposition, rebalance and strategise to navigate a tough market. With hopes for a sales boost over the festive period dashed, Morrisons’ strategy is under more scrutiny than ever and its shareholders are getting nervous.
All eyes are now fixed firmly on the company to see what it will do next, particularly in relation to its £9bn property portfolio. Estates Gazette met with the group’s head of property Terry Hartwell to talk strategy and expansion plans. He refused to talk about the proposed sale of some of its freehold estate or the Christmas figures but was keen to show the firm is addressing its convenience and online shortcomings.
Predicament
The fact that Christmas sales figures dropped was not a great shock, especially after a previous 2.4% like-for-like sales drop in the 13 weeks to ?3 November and a fall in pretax profit from £947m to £879m for the year ending February 2013. It was the severity of the figures that sparked concern.
“Morrisons’ performance is pretty black and white,” says Andrew Porteous, food retail analyst at Agency Partners.
“It was the worst-performing of the three quoted retailers over Christmas. It suggests that there are some errors being made in its core strategy. Morrisons is curing its online and convenience shortcomings but if it is making mistakes in its core estate – as the recent results suggest – then that is worrying.”
Activist investors including one of the most aggressive US hedge funds, Elliott Associates, are pressing for an overhaul of the group’s property portfolio and the retailer is expected to undertake a sale and leaseback of 10% of its freehold estate in a bid to realise value for its shareholders.
But several investors are understood to want Morrisons to go one step further and follow an example set by Canadian food retailer Loblaw, which separated out its property portfolio last year and sold 20% to investors.
Either could be on the table. Here Hartwell refers to the group’s well documented balance sheet review: “It [the review] looks into property holdings with a view to deciding how best to return value to shareholders. We will look at everything – sale and leasebacks, opco-propco structures and securitisation options.”
Morrisons’ predicament has also invited comparisons with its rival, Sainsbury’s. In 2007, property tycoon Robert Tchenguiz, who then owned a 5% stake in the supermarket chain, pushed for the separation of the operating business from the property assets to raise money. After months of speculation, Sainsbury’s confirmed in May of that year that it would not bow to pressure to spin them off into a separate company.
The next step
An opco-propco structure is also considered an unlikely route for Morrisons to go down according to analysts and agents. “The location of assets is highly important in the sector and so it is unattractive for a retailer to lose control of its core assets,” says Porteous.
Tom Edson, director at Jones Lang LaSalle, adds: “I don’t think it will be an avenue Morrisons will choose to pursue. UK foodstore operators prefer to keep the estate and operational aspects of the business under one roof.”
When the results of the balance sheet review are revealed in March, it is expected instead that Morrisons most likely move will be to follow competitors including Tesco and Sainsbury’s and complete a sale and leaseback of some of its estate.
Chris Keen, director at CBRE, says: “There is a huge appetite among the major funds to invest in Morrisons as many are overweight in Tesco and Sainsbury’s. It is likely any opportunities would attract a premium in the short term due to this factor, regardless of any disappointments in Morrisons’ recent trading.”
But there is concern that a sale and leaseback of a large proportion of Morrisons’ freehold estate could put pressure on its profits.
Porteous explains: “Sale and leasebacks have put pressure on Morrisons’ rivals over the years. A large rent bill will put pressure on the profits of the business and should be treated with particular caution, given its current performance.”
EG analysis shows a profit margin of 5.2% for Morrisons eroded to 3.3% for Tesco, which has sold off a lot of property.
Alternatives
Edson believes securitisation holds potential as a lifeline for Morrisons. It is a strategy that supermarkets have used before because they maintain control of the freehold.
He explains: “To pursue this strategy, Morrisons would need to pull together a portfolio of at least 10 assets to make securitisation a viable option. But careful consideration will have to be given to the facility structure, as the firm will be mindful of additional debt, which could in turn affect Morrisons’ credit rating.”
The move online and the push to M Local convenience stores is expected to boost its accessible market by as much as 40%.
Morrisons now has 85 convenience stores of 3,000 sq ft each across the UK, of which around half are in London and the South East. It aims to open 100 this year and next, with a target to have 200 M Locals open by the 2014-15 year end.
Hartwell says that the group will open just 12 full-line supermarkets in 2014 – down from the 18 it opened last year. It is limiting the expansion of new supermarket space to around 350,000 sq ft annually from 2014-15, which is slightly less than half of the average rate of growth over the past five years.
“Our overall target for space has not really changed but the mix of that space has, as we have moved more into the convenience market,” he says. “It is about creating oxygen within the business to get its head around a very, very busy convenience store opening programme.
“There are only so many hours – and board air time – in the day to get investment proposals through. To think we could do everything is unrealistic. If you expand one channel, you have to see a contraction in another.”
The group is also taking advantage of more widespread retail woe, and has bought 62 stores this year from the administrators of Blockbuster, HMV and Jessops to convert into convenience shops.
The other piece of the jigsaw is the launch of online food deliveries through a hub-and-spoke strategy. Morrisons confirmed a tie-up with Ocado last May, and this month started food deliveries in Warwickshire directly from Dordon. It will be followed by an extension to Yorkshire using a delivery spoke in Leeds. The group aims to be serving more than half of all UK homes by the end of the year.
Keeping up
The major issue here is obvious. Convenience stores and moving online are great strategies – great strategies that Morrisons’ rivals have been doing for years. The company is lagging behind and needs to act fast if it is to keep up. Hartwell admits that the growth plans are not for the faint-hearted. “Competition within the convenience sector is as hot and intense as it has ever been because there are now five or six players in that market and we are largely all looking for similar types of properties,” he says.
His goal remains for Morrisons to be “everywhere” within five years, with “hundreds of convenience stores and our online offer”.
He goes so far as to say: “We will be the only retailer that has really cracked delivery of fresh food online. And life will be wonderful.”
Here’s hoping. Because for now, at least, wonderful seems a long way off.
annabel.dixon@estatesgazette.com
