Morrisons steps up internet shopping plans

“I set up the knowledge transfer process and induction for business leads heading to Fresh Direct in New York”

The Guardian: 10 March 2011

Bradford-based supermarket chain Morrisons has snapped up a 10% stake in America’s profitable answer to Ocado – but signalled it will not offer its own grocery delivery service until 2013. The company’s chief executive, Dalton Philips, claimed the £32m investment in US internet grocer FreshDirect would enable Morrisons to avoid the pitfalls encountered by rivals such as Tesco and Sainsbury’s, whose food websites he claimed looked the “same” and did not make money in their own right.

“We don’t think anybody has cracked affordable fresh food online,” he said. “I don’t believe anybody is profitable online today. “Morrisons is the only member of the big four without a substantial internet business and the FreshDirect deal comes hot on the heels of its £70m acquisition of baby goods retailer The FreshDirect purchase was one of several initiatives announced at the grocer’s results, where it reported profits up 13% to £869m on sales of £16.5bn.

Morrisons also outlined tentative plans for a convenience chain, M Local, with three stores scheduled to open this year, the first one in July. Convenience store retailing is one of the fastest growing areas of the market, with analysts at IGD predicting sales will soar from £30bn to £41bn by 2014.

Morrisons is the UK’s fourth-largest grocer and Philips said it would expand its estate more aggressively, as 6.8m households were still outside its stores’ catchments. It set a new target to open 2.5m sq ft of selling space over the next three years – equivalent to 83 supermarkets.

Morrisons is looking to squeeze more trading space out of the 440 stores it has already, by editing ranges and refurbishing shops. Philips used the example of its air freshener selection, which in one trial has been cut from 168 products to 92: “We had 58 varieties of plug-in air freshener!” Such changes, he said, could free 750,000 sq ft of space – equal to 25 supermarkets – enabling it to stock more clothing and homewares, before the launch of its non-food website next spring.

Morrisons disappointed some analysts by signalling a food website was two years away. Indeed, finance director Richard Pennycook said it would only embrace the sales channel if it could do so profitably: “We will not go into a model where we haven’t figured out how it is going to work. We think it [FreshDirect] will be a great investment financially anyway.”

A team with “clipboards” will be despatched to study the FreshDirect model while others will work alongside staff who prepare the food in its industrial kitchen. Philips was attracted by the strength of the fresh food offer, which even lets customers tailor the cut of steak they want. He described the operation as less automated than Ocado, which fulfils customer orders from a hi-tech warehouse in Hatfield, north London.

Morrisons said consumers’ disposable incomes were being squeezed by higher petrol prices, which have added £9 to the cost of filling an average car tank in the past year. It eked out like-for-like sales growth of just 0.5% in the fourth quarter and predicted trading conditions would be “challenging” this year.

To preserve profit margins, the retailer is targeting internal savings of £100m a year for the next three years, achieved through an efficiency drive taking in all aspects of the business.

Morrisons was the second biggest riser in the FTSE 100, finishing up 4.5p at 285p. Its shares are valued at a discount to Tesco and Sainsbury’s because until now it has failed to diversify. To attract new investors, it is to buy back £1bn of shares over the next two years and lift its dividend.

Oriel analyst Jonathan Pritchard questioned the timetable for the retailers plans, with a “little more pace” desirable: “Our view remains that Morrisons lacks verve in its marketing and customer appeal right now and any surprises ahead could be negative. The shares are dead money at best.”

What is FreshDirect?

What Ocado is to the Londoner, FreshDirect is to the time-strapped New Yorker. That rarest of beasts, a profitable internet grocer, FreshDirect delivers 45,000 orders a week in New York, New Jersey and Connecticut from its modest base on Long Island.

It was co-founded in 1999 by Jason Ackerman, a former investment banker who specialised in the grocery industry, and has differentiated itself by getting products directly from nearby farms, dairies and fisheries. It sells a range of 600 ready meals, prepared in its own kitchen.

Sales for 2010 were on track to hit $300m (£187m), up 20% year on year, with earnings before financial charges near $30m.