ANALYSIS-Morrison's eyes small stores, non-food for growth

Trade the News

Saturday September 04, 2010 07:43:12 AM GMT

* New CEO to give initial thoughts on business on Sept. 9

* Small stores, non-food, online likely areas of focus

* Diversifying growth key to closing valuation discount

By Mark Potter, European Retail Correspondent

LONDON, Sept 3 (Reuters) - Plans to open more smaller stores, revamp non-food ranges and eventually move online could help Wm Morrison Supermarkets, Britain's No.4 grocer, to close the share price discount to its competitors.

New chief executive Dalton Philips will set out his initial thoughts on the business on Thursday and is in the enviable position of taking over a company that has been performing strongly in recent years, outpacing sales growth at bigger rivals Tesco, Asda and J Sainsbury.

Confirming its recovery from the botched acquisition of Safeway in 2004, Morrison's will report a 14-percent rise in first-half underlying profit to 409 million pounds ($630 million) on Thursday, according to a Reuters poll of 7 analysts.

But its shares have lagged the STOXX 600 European retail index by 12 percent over the past year and are valued below most rivals as a multiple of forecast earnings.

That is because investors fear the turnaround has played out and Morrison's is missing the growth opportunities of its peers.

"Although the business is in good overall health, in our view it lacks a compelling growth avenue at present," said UBS analyst Mike Tattersall.

"Targeting any or all of the 'growth' areas of the UK industry (convenience stores, non-food, internet service) would be logical at this point albeit that building capacity will take a number of years."

Analysts caution that Philips, who joined on March 29 from Canadian grocer Loblaw, will only give an outline of his thinking and leave the details to full-year results in March, when the group has promised a review of its balance sheet.

He also does not have the firepower of industry heavyweights like Tesco and Wal-Mart to expand on multiple fronts, and so will have to prioritise.

Riskier or more expensive investments, like expanding abroad, into financial and other services, or introducing a loyalty card, are likely to stay on the back burner.

But that still leaves plenty of room for Morrison's to build on its goal to move from a "national to nationwide" retailer, which could include a drive to expand smaller stores, revamp non-food ranges and move online.

And Citi analysts think that should satisfy investors.

"The scope for Morrison to re-rate upwards after the market gets more comfortable with the new CEO's strategy is considerable," they wrote in a research note.

Morrison's shares trade at 12.6 times forecast earnings, below Tesco on 12.7, Sainsbury's on 15.0, and a European sector average of 14.0, according to Thomson Reuters data.

GROWTH DRIVERS

One focus for Philips is likely to be expanding into smaller neighbourhood and convenience stores, where sales have been surging in recent years as time-pressed consumers look to do more shopping locally and save on rising petrol costs.

Grocery industry group IGD forecasts the convenience store sector will reach 41.3 billion pounds in 2015 from 29 billion in 2009, outstripping growth in the broader grocery market.

Tesco already has a big presence in smaller stores, while Sainsbury is rapidly expanding there and Asda struck a deal in May to buy 193 mostly small shops from Netto UK.

But the market is still more fragmented than for larger stores and Morrison's has already made progress in squeezing its fresh food "Market Street" counters -- its key differentiator from rivals -- into smaller shops in recent years.

Going small could also help Morrison's to achieve its goal becoming a force in the southeast of England, where it is currently underrepresented against its national presence and it is notoriously hard to get planning permission for large stores.

Barclays Capital analyst James Anstead thinks a drive for smaller shops could eventually form part of a move to increase Morrison's existing expansion plan to add 1.5 million square feet of selling space by 2013, warning that if it does not do this it will lose market share to faster growing rivals.

Much of the new space being added by competitors is devoted to higher margin non-food goods.

Analysts think Morrison's will struggle to replicate the breadth and depth of its peers in this area, mainly because its supermarkets are mostly mid-sized, at about 35-40,000 square feet, with limited opportunities for extension.

But they believe there is much more it can to do improve the authority of its ranges.

RBS's Justin Scarborough, for example, is encouraged by the group's recent pilot of a homewares range, as well as a trial concession with budget clothing group Peacocks.

Online grocery retailing, which is also enjoying rapid growth, is another possible area of interest for Morrison's, although the level of investment and lengthy payback could move it down Philips' list of priorities.

More likely is that, with his broad experience from Wal-Mart to Irish department store group Brown Thomas, he will focus on the sort of retailing details -- improving distribution, IT systems and product ranges -- that attract little attention, but are crucial for improving margins and returns for investors. (Editing by Sitaraman Shankar)

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