Our performance over the year confirms our broadening customer appeal, successfully delivered in a wide range of stores from 11,000 to 40,000+ square feet. We have identified significant potential to attract new customers and will focus on space growth in order to take us from a national to a nationwide company.
Strategy update
Our three year strategy, as laid out in our 2007 Annual report, is to position the business as the UK’s ‘food specialist for everyone’. This builds on our historic strengths of value and fresh food quality, now applied to a national, bigger business following the Safeway acquisition in 2004. As a food specialist, we are clearly differentiated from our larger competitors, all of whom are seeking to expand their non-food credentials. We also emphasise our deep understanding of food: through being closer to source than other retailers, through our unique manufacturing and packing facilities, through the amount of food preparation undertaken in our stores and through the employment of more specialist butchers, fishmongers and bakers than our competitors. We stress that our offer is for everyone, because our great food is also always great value.
Our strategy builds on our strengths, and is in tune with our customers’ need for excellent value and their increasing focus on the health, provenance, quality and freshness of the food they buy. In order to deliver our strategy, we have previously outlined the building blocks that need to be put in place, and our plans to do this by 2010. These include freshening up our stores and improving and developing the infrastructure of the business in the key areas of manufacturing, distribution and operating systems. The operating review of the year highlights our progress towards these goals.
Store estate development
From our position as the fourth largest grocery retailer in the UK, we see significant opportunities to expand our store estate. As the food specialist for everyone, it is our conviction that we offer a real difference in grocery retailing that is highly attractive to a broad range of customers. However, there are many parts of the country where we remain under-represented. We estimate there to be over eight million households in the UK which are not located within a 15 minute drive of a current Morrisons store. This represents a higher target customer base than any of our three larger competitors. Our offer works well in a wide range of store sizes, from 11,000 to over 40,000 square feet, giving us flexibility in site selection. A key part of our strategy, therefore, has been to grow the number of Morrisons stores, and in 2007 we published a target of adding 1.0m square feet of new space by January 2010. Our acquisition of Co-operative/Somerfield stores, completing in the coming year, will see that target exceeded by 0.5m square feet, and we are confident that we will open a further 0.5m square feet of retail space in the year to January 2011.
We believe that delivery of our strategy of expansion and further optimisation of the operation of the business has resulted in strongly improved profit margins for our shareholders, whilst also positioning the Group for long term growth.
Solid shareholder investment and returns
The Group is securely financed and has a strong balance sheet. We are confident that our planned investment requirements can be met from existing facilities. We will continue to pursue a prudent approach to financial management which is based on a number of principles:
- we wish to maintain a strong investment grade balance sheet;
- operational control of our retail stores is fundamental to us;
- we are a prudent organisation and we structure our finances accordingly; and
- our defined benefit pension schemes’ assets and liabilities are effectively part of our balance sheet, and should be managed as such.
The Board concluded in March 2008 that surplus capital of £1bn should be returned to shareholders during 2008 and 2009, with £500m of that to be delivered in the first 12 months of the programme. Whilst £146m was returned in 2008 through share buybacks, the Board also identified new investment opportunities for the Group, over and above our original plans. These were the acquisition of stores from the Co-operative Group, the purchase of the freehold interest in our planned distribution centre at Sittingbourne and the acquisition of the freehold interest of four existing stores which, combined, account for unplanned investments of £460m. The Board believes these growth opportunities represent a more attractive deployment of capital than the planned share buyback. The Board also believes that further investment opportunities may arise in the medium term and has therefore decided that the capital originally earmarked for share buybacks in the 2009/10 financial year should be retained within the business to give Morrisons maximum financial flexibility.
We have targeted progressive dividend growth in 2008 and 2009, over and above earnings growth, in order to bring dividend cover to a level in line with the average for our sector, which is around 2.5 times, by January 2010. Funding for this enhanced return to shareholders will come from operating cash flow and committed facilities available to the Group.
