WM Morrison – a case study

(Note: Before you read on anything I predict is ‘Underlined,’ apart from sub-headings.)

1. Knowing the competition and what to look for

WM Morrison is a supermarket with sales mostly deriving from the UK. The business is traditionally part of a consortium of the so-called ‘big four’ supermarket that control the UK grocery market. There’re other players in this market, but they target a certain group of people, one are Waitrose and M&S; these are high-end supermarkets, the other being low-end supermarkets such as Aldi and Lidl. Also, I shouldn’t forget about the thousands of small and medium-size local shops covering the UK.

So knowing the supermarket is our first step to knowing the service they’re offering, the quality of its products, the targeted market and its reach to this market.

The second thing to do is to establish a financial metric system to evaluate WM Morrison’s financial and operating performance against its peers, and being a food retailer these are the most common metrics:

a. Like-for-Like sales;

b. Revenue against number of stores or number of sq. ft., employees and staff costs over revenue;

c. Overall year on year increase/decrease of revenue;

d. Profitability ratios (very important due to low margins in this sector);

e. The change in market share over a five to ten year period;

Thirdly, we need to look for other measurements that could differentiate WM Morrison from their peers such as an online presence, overseas markets and diversification.

Fourth, we can look at WM Morrison market valuation and compare against their rivals. The most important thing here is the trend.

Lastly, we take a look at each of the supermarket and the current valuation it is being received from the market.

2. A Financial metric system for comparison

a. Table is showing like-for-like sales (%) and annual revenue for WM Morrison and peers:

(Annual basis)

2014

2013

2012

WM Morrison

-2.8% (£17.7bn)

-2.1% (£18.1bn)

1.8% (£17.7bn)

Sainsbury

0.2% (£23.9bn)

1.8% (£23.3bn)

2.1% (£22.2bn)

Tesco

-1.3% (£63.5bn)

-0.3% (£64.8bn)

0% (£63.9bn)

b. Table is showing revenue against number of stores or number of sq. m/ft. and number of employees:

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About the Author

Orangetree

Premium Member

4 comments

ExpectingValue

Much of the analysis is made complicated by the mix differences the main three supermarkets have in terms of the smaller convenience format. Tesco were ahead of both Sainsbury's and WM Morrison on this one, and I recall that convenience as a segment has been continually taking share from the 'big box' stores.

I've tried to do sectoral comparisons on the big supermarkets myself and, while they are instructive, we're missing a lot of the information we'd really like - ASDA, Aldi, Lidl and Waitrose are all big (or, more importantly, growing) players we have to exclude from any comparison, and we are the lesser for it. Tesco's international operations confuse their group picture and UK comparisons.

I broadly pull the opposite conclusions to you, though. While the sector as a whole is rough - investing in any of the three big supermarkets is putting your money in a sector which is facing more (and better) competition than it has done for a long time - I tend to think Tesco has the edge by virtue of the fact it has those international operations. They still earn a better return on capital than any of their peers.

Reply
Orangetree

Dear Expecting Value,

Sorry for the late late reply, as i wanted to test my theory out. It turns out i was too optimistic in my forecast and all three have performed poorly, especially Tesco losing more than a third in value since May.
The sell signal for me is two months after the CFO made his dramatic departure, and Tesco failure to appoint new CFO!!! A major red flag, as BoD knows the numbers are manipulated therefore appointing a reputable CFO on time would not be good for the now ex-CEO Phillip Clarke.

Now, in absence of any strategy from Tesco, you may be interested in reading an article i written up in Seeking Alpha by comparing Tesco and Carrefour (the second largest supermarket in the world) HERE.
Carrefour experience the same thing like Tesco and has since able to compete with the discounters, it took ten years to turn this around.

Reply
intuitive6191

For me one of the easiest sectors to research by direct experience is Food Retailing. The products are easy to compare on price and quality. The quality and number of staff are very visible and the overall layout and effectiveness of the store is immediately apparent. Most of my thoughts are therefore based on what I see happening on the ground.

In my home town there is an Aldi, Tesco and Morrisons forming a triangle around a car park. 15 minutes sat in the car park is most illuminating. The first and most obvious point which comes to mind is that there is no "profile customer" any more. Well heeled types come out of Aldi and dump their purchases in the Land Rover. There are others who seem to use all three - presumably buying the best offers/personal preferences at each store.

The clear winner however is Aldi. Two or three years ago there was only myself and a few other lost souls wandering around now the is a queue at every till most of the time. The store is clearly laid out with virtually no stock outs and Staff are very flexible, working the tills and filling shelves. The sales per sq ft must be very impressive.

The clear loser is Tesco. It is one of their smaller stores and seems to have struggled to withstand the Aldi onslaught. Recently it seems to have installed a new manager who seems to be making a difference - but this is not going to be quick turnaround.

The enigma for me is Morrisons.The store is laid out well and they have the best potential story with their vertical supply chains. Their prices are reasonable and store seems to be quite busy. If you didnt know the figures you would assume that they are doing fairly well.

From my personal experiences its clear to me that Food Retailing is undergoing a permanent shift in the UK. I couldn't invest in Tesco because it seems to me to have the most to lose and the least capability to defend itself.I would argue that the sector is undergoing so much change and uncertainty that the best valuation is one that identifies the most obvious takeover potential. For me this is Sainsbury closely followed by Morrisons.

In the recent fallout I have bought a few of both as a speculative takeover punt - but they are not high conviction buys.

Reply
Orangetree

Couldn't agree more intuitive6191, but i feel that given time and the right valuation Tesco can be a buy in the future.
Right now, they don't have a strategic plans to deal with the discounters, new management needs time to learn about Tesco's flawed business model and the company as a whole need a change in mindset.
At the same time, the discounters plan to steamroll the traditional supermarkets, when Aldi announces plan to open 1,000 new stores in 8 years.

But there is hope, if you look across the pond in France where Carrefour has to deal with the discounters, and now they are taking back market share from them.

Reply
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