Morrisons to cut prices amid losses
Morrisons chief executive Dalton Philips has pledged to slash prices to take on its discount rivals as the grocer tumbled to a £176 million annual pre-tax loss.
Earnings were wiped out amid declining sales and exceptional costs of £903 million from write-downs on the value of its stores and the planned sale of its poorly-performing children's wear retailer Kiddicare.
Like-for-like sales for the year to February 2 were down 2.8% as the group and its major rivals faced what Mr Philips said was the biggest structural shift in the grocery sector since the advent of supermarkets in the 1950s.
Mr Philips said Morrisons had the most to lose as shoppers were now choosing to save by using the likes of Aldi and Lidl even if they were no longer struggling to make ends meet as the economy improved.
Shares plunged by as much as 10% after the group plunged into the red after reporting an £879 million profit the year before, and as it also issued a profits warning for the current financial year.
Mr Philips unveiled plans to invest £1 billion over three years to improve value and "defend and strengthen our competitive position", using savings on procurement, systems and other costs. It will also launch a new loyalty card scheme.
He said: "We are going to lower our prices on a permanent basis.
"The biggest challenge that we face is that there has been a fundamental change in how consumers view discounters.
"They are no longer going to them out of necessity. The perception has changed and there is a new price norm."
Meanwhile, a shift in focus to grow convenience stores and its online operation - the latter belatedly launched just eight weeks ago - will see the pipeline of new supermarkets slow to a trickle. After 2015/16 they will only be built in exceptional circumstances.
Morrisons will also sell off £1 billion of its £9 billion property portfolio by 2016/17, including a small number of stores. This will include £400-500 million of disposals in the current financial year.
But the vast majority of its estate will remain in the hands of the company on a freehold basis, despite calls by some activist investors for a more radical sale-and-leaseback shift.
Mr Philips said: "The strategy we are announcing today is a bold and comprehensive response to the fundamental structural changes that are taking place in grocery retail."
But it was not enough to convince the City, especially after Morrisons warned underlying profits - before exceptional items - would drop by more than half to £325-£375 million for 2014/15. They fell 13% to £785 million in the latest results.
Mr Philips's grim warning for the future of the sector also saw shares in Sainsbury's and Tesco fall sharply.
The chief executive said all the major supermarkets were losing out to the discounters but that it had a bigger "overlap" than any of its major rivals.
"The rules have changed and we must change too. It is absolutely critical that we begin winning again in our core supermarkets. To do that we must compete on price," he said.
But Mr Philips insisted that Morrisons would not turn into a discounter itself, saying its prices would not have to match theirs but to be just low enough that its fresh food and quality offer would look worthwhile.
Instead it would become "a distinctive, lower priced fresh food grocer where you can do your full shop".
The chief executive defended his record four years after taking over at the supermarket, saying he had faced four major structural challenges.
He said he had addressed three of them: the lack of a web operation; the need to roll out convenience stores; and antiquated IT systems. He was now taking on the burgeoning threat from the discounters.
Morrisons said the online offer, currently available in Warwickshire and Yorkshire but being rolled out across much of the rest of the country, was "performing ahead of plan".
The annual results showed that a £379 million part of the group's exceptional costs were write-downs on the value of existing stores, with £319 million relating to its store pipeline.
Another £163 million will be written off on the disposal of Kiddicare, the baby and infant merchandising retailer it bought in 2011, amid a disappointing performance.
Morrisons said it would dispose of its stake in New York-based online grocer Fresh Direct as well, which it also bought in 2011 as it sought to develop its expertise in preparation for the launch of its own web offering.
Though shares tumbled on today's results, a number of analysts were more optimistic about the stock after the strategy overhaul.
Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said "not all is doom and gloom" with the roll-out of online and convenience stores under way and a 10% hike in the company's dividend.