Morrisons vs the discounters
The battle for supermarket customers is on
As most of us mope around at home, talking to people on Zoom and cooking way more than usual, supermarkets’ revenues are booming.
People across the UK made an extra 79 million shopping trips in March compared to last year. Those shops generated an extra £1.9 billion in revenue for supermarkets (and a lot of long queues for shoppers).
One of the companies that benefited from this surge in spending was Morrisons. Market research firm Nielsen found that the chain saw a 19.4 per cent increase in sales in March compared to the same month in 2019.
Some Freetraders appear to have anticipated that an uptick in sales will translate into good stock performance. The amount of cash they spent on Morrisons shares increased five-fold this April compared to January, with investment up about 3-fold on the app as a whole.
A welcome boost
This spike in revenue came at a time when Morrisons was attempting to make large-scale changes to its set of operations.
Back in January, the firm said that it would be replacing 3,000 people in management roles with 7,000 working in-store in “customer service positions.”
Anyone in one of those management roles that wanted to keep their job would have to effectively downgrade into one of these new positions or find work elsewhere.
That decision was part of a wider set of measures that Morrisons, along with other UK supermarkets, has taken to counter the move that shoppers are making towards discount stores like Lidl and Aldi.
The supermarket wars
There’s always been fierce competition between the major supermarkets in the UK.
Tesco, Sainsbury’s, Asda and Morrisons are usually known as the ‘big four’ as they are the four most popular supermarkets in the country.
But Aldi and Lidl, both German companies, have been making inroads into the UK market for a long time now.
Aldi opened its first store here in 1990. By August of last year, it had more than 600.
Lidl, at least in terms of store numbers, has been even more successful. Although it arrived in 1994, four years after its German counterpart, it managed to open its 800th store in February of this year — just in time for the pandemic!
Going discount
Lidl and Aldi operate using similar business models. Both companies, for instance, have comparatively smaller stores to keep their rents down.
They also tend to offer a smaller set of products and brands. If you go to Tesco you might find five different kinds of mustard. Go to Lidl and you’ll probably only find one or two.
Along with a bunch of other strategies, the effect of this is to make it cheaper for them to run their stores and easier to bulk-buy at lower prices.
Their success has had a profound effect on the UK supermarket business. By 2014, more than 50 per cent of people in the country had shopped at a Lidl or Aldi store.
Of course, the more people go to these two shops, the less they go to the ‘big four’ or other supermarkets like M&S and Waitrose.
As a result, almost all supermarkets in the UK have had to compete harder for customers and make commensurate changes to do so.
Long Term Investment Plan
Morrisons’ plans to cut 3,000 management jobs and replace them with in-store roles was part of a wider strategy that had been in the works for years.
Three former Tesco executives have been brought into the firm over the past 11 years. First came Trevor Strain in 2009, now Morrisons’ chief financial officer (CFO). In 2015, the supermarket chain appointed Tesco’s former CFO, Andrew Higginson, as non-executive chairman.
Higginson then brought in David Potts as CEO in 2015. Potts left Tesco in 2011 after spending 38 years at the company. His final role there was to head up the supermarket’s Asian business.
Once the trio were united, which makes it sound much more epic than it was, Potts and Strain were given a three year ‘long term investment plan’ (LTIP) to ensure Morrisons’ future success. LTIPs are used by lots of companies. They define a specific set of goals, aimed at boosting shareholder value, that employees will have to try and meet.
Strain and Potts met the goals of their initial LTIP. Potts in particular is credited with shuttering failing convenience stores and making more favourable deals for Morrisons with Amazon and Ocado.
Their ‘success’, however, was questioned by many shareholders, who claimed that the LTIP’s targets may have been too easy. At the company’s 2017 annual general meeting, shareholders nearly prevented the pair from being paid out the stock they were supposed to receive as an award for meeting those targets.
In the years after this, the terms of future LTIP share payouts were changed. Along with trickier targets, Potts and Strain can’t sell any shares they receive as a reward for hitting LTIP targets for more than five years after they receive them.
What now?
Just as Morrisons was attempting to make sweeping changes to its operations, the coronavirus came in and messed everything up. To paraphrase Mike Tyson, everyone has a plan until there’s a global pandemic.
Since the lockdown went live in the UK, Morrisons has had to put its goals for supermarket domination on hold and hire an additional 3,500 people to meet increasing consumer demand, particularly for home deliveries.
Sales are way up for now but the question is whether this will continue. As you may have noticed, many people are claiming to know what’s happening when it’s quite obvious that they don’t.
If the lockdown continues for a while and pubs, bars and restaurants remain closed, it’s likely that sales will stay strong at Morrisons (and the other supermarkets).
But if we start returning to normal life then Morrisons may find itself back where it started. Competing against discount stores and needing to restructure. They might also find that people don’t buy baked beans for a while because they bought 50 tins back in March.
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