Supermarket giant Morrisons plight is a lesson on neglecting multi-channel retail
- Summary:
- Supermarket giant Morrisons has neglected to invest in IT and not made the move to multi-channel retail effectively. As such it's paid a high price and delivered a salutary lesson to retail firms around the globe. But is all lost?
A salutary reminder of the importance of this came this week when UK’s fourth largest supermarket chain Morrisons announced a full year pre-tax loss of £176 million for the year to 2 February 2014 against a profit of £879 million the previous year.
With commendable candor, the firm blamed its own lack of foresight in investing in technology as a major factor alongside increased competition from low budget rivals such as Aldi and Lidl.
Morrisons’ chairman Sir Ian Gibson stated:
“The discount sector has performed strongly, driving much of the market growth. The rest of the market has been working hard to counter this threat, with particular emphasis on loyalty programmes and personalised couponing, areas in which Morrisons has not been able to participate fully to date, due to outdated IT infrastructure and systems.
“Whilst these factors, combined with the fact that we do not yet have a meaningful presence in online and convenience - the two fastest growing channels in the grocery market - have clearly held us back, and the overall performance of our core business has been disappointing.”
The firm has been upfront about being held back what it called an “antiquated” IT infrastructure which had prevented it from running a loyalty card scheme for example, putting the firm at a major competitive disadvantage.
Last year CEO Dalton Philips pledged a £300 million investment in IT to get the firm’s infrastructure fit for the 21st century. This is scoped as a six year development project to replace legacy systems with “industry-leading software capability”.
In its financial statement, Morrisons confirmed:
“The prime focus for the past year has been on improving our supply chain and forecasting through the introduction of new tools. The solution replaces legacy systems for the management of the warehouse, updates core systems for the management of product information and implements new systems to enable electronic communication with our suppliers.
"This technology has provided us with the ability to track stock at every stage during its journey through the warehouse, improving accuracy and enabling us to improve our service levels and availability in store.”
It added:
“This comprehensive and business transforming project has enabled us to exceed our three-year savings target of £100 million. More importantly, it has provided us with an outstanding IT infrastructure that will allow us to drive even more efficiencies into the business in the years ahead and we will soon be in a position to decommission our legacy IT systems.”
Too late?
But the big question is whether it’s too little, too late?
The firm only entered the online groceries market with Morrisons.com in January this year, years after its major competitors Tesco and Sainsbury. At the moment Morrisons only delivers groceries to around 20% of UK households, mainly in Warwickshire and Yorkshire.
As part of a more aggressive expansion of its online footprint, Morrisons intends to sell off its online baby goods arm Kiddicare which was acquired in 2011 with the intention of using that firm’s technology and experience as the basis for its online food operation.
In the event however a decision was taken to team up with Ocado rather than use the Kiddicare infrastructure in order to get an online offering up and running “far earlier” than trying to develop its own in-house solution. This led to online cost write-offs of £27 million in the first half of 2013 as Morrison’s set up an independent online operation.
Kiddicare’s performance has also been deemed disappointing, contributing to the decision to dispose of the operation. In its trading statement, Morrisons confirmed:
“It is imperative that Morrisons focuses very clearly on its core grocery channel. Kiddicare no longer fits our strategy and its poor financial performance will take time to address. We will seek to sell the business in 2014.”
Also on the way out is Morrisons stake in New York-based online food store Fresh Direct:
“We have learnt a huge amount from this association and have incorporated many of their concepts into our new food online proposition. With an experienced management team in place and Morrisons.com now successfully launched, we no longer need to retain this investment and will therefore dispose of it at the appropriate time.”
CEO Philips valiantly insists that even if the firm was late to market, its online proposition is now ahead of expectations:
“Convenience, online and the discount channels are the fastest growing sectors of the market and this trend is expected to continue. This will be reflected in changing format development as retailers look to align with ever evolving customer needs, behaviours and attitudes.
“By the end of 2014, the online grocery market is expected to grow to £7.7 billion, up 18% on 2013 and is forecast to grow to £14.6 billion by 2014, when it is projected to account for 7.1% of the total UK grocery market, almost double what it is today. It presents an exciting opportunity for Morrisons.”
He adds that Morrisons has taken a lot from its relationship with Fresh Direct in particular:
“We have learnt a huge amount from this association and have incorporated many of their concepts into our new food online proposition.
“We differentiate our fresh offer, just as we do in store, addressing our customers’ demand for freshness by offering an expert review quality rating and by allowing them to check the freshness of products on their doorstep, before accepting them.”
But the fact remains that Morrison’s dependence on its relationship with Ocado means sharing profits with its partner which will surely undermine its online growth?
Loyalty
On the loyalty card front, Morrisons runs a Morrison Miles loyalty card based around gasoline sales, but 5.5 million of these are unregistered and as such are essentially useless in providing the customer profiling that Tesco’s ClubCard and Sainsbury’s Nectar cards generate.
“We do already have a loyalty scheme, Morrisons Miles, which rewards the over five million customers who buy fuel from us. In the first quarter of the year we will start to build on that asset, by registering our Morrisons Miles cardholders.
“The bigger opportunity lies in the 12 million customers who shop with us in store. Getting to know them – who they are and what they want – will enable an even greater opportunity to focus where we invest.
“We now have the necessary systems capability and have commenced trialling a distinctive and customer-focused Morrisons card, which we expect to roll out before the end of the 2014/15 financial year.
“This is an outstanding opportunity to interact with our customers and will enable an even greater step change to the way in which we invest in our commercial proposition.”
Amazon calling
But the question remains: is all this too late?
Philips of course takes an upbeat view, claiming the developments are:
“...a bold and comprehensive response to the fundamental and structural changes that are taking place in grocery retail.
I’m confident that Morrisons will emerge from this period of necessary change… well positioned to compete sustainably in the new grocery landscape.”
“The outlook statement is truly awful, predicting a collapse in profits to £325 million–375 million, versus our forecast of £672 million and consensus of £684 million, as they invest £1 billion in their proposition over the next three years.”
On a wider canvas, there’s also the threat faced by all online grocery operations of an incursion by Amazon onto their turf as it expands its Fresh grocery business within the US, while reportedly ramping up plans to launch in Germany as a first step in a global push.
There’s plenty of opportunity for Amazon outside of the US where it’s been trialling Fresh for 8 years in Seattle. According to food and consumer goods research group IGD, online grocery sales will roughly double from 2012 to 2016 in five European markets - Britain, France, Germany, Switzerland and the Netherlands.
At the Retail Week Live conference this week Ocado CEO Tim Steiner predicted:
"What Amazon is clearly doing is awakening the global grocers to the online challenge they are going to face and they are accelerating the opportunities for us as a platform partner provider.”
"Ask me who will be our biggest competitor in online grocery in 20 years time, is it more likely to be Waitrose or Tesco or Amazon? I would place my money on Amazon.
"Grocery retailing over the next 20 years is going to be driven by technology. I don't rate the technological skills of my competitors versus the technological skills of Amazon."
Verdict
I shop in Morrisons every week for the simple reason that it’s my closest physical supermarket.
But when doing a big monthly shop, I default automatically to Ocado and its offerings from the more upmarket chain Waitrose so there’s no customer loyalty there.
Morrisons has paid a high price for neglecting the shifting nature of the supermarket industry. I can’t say I share Phillips optimistic interpretation of Morrisons future success.
But as a case study in what happens when you ignore the rise of the multi-channel customer, Morrisons is a lesson to retailers worldwide.
