Operating review of the year
Our programme to freshen-up our stores by rolling out a new look through the estate will be completed by July 2008.
Market Street - York store, Foss Islands Retail Park
2007/08 was a strong year for Morrisons - we delivered good progress on our long term plans and continued the profit recovery momentum of the previous year. Our debt fell, despite investment for the future.
We opened eight new stores in the year, at Johnstone, Speke, Erskine, Wednesbury, Dundee, Llanelli, York, and Bristol (Hartcliffe). The store in Erskine was a replacement for another store in the town, and at 25,000 square feet was the smallest new Morrisons opened for many years. We are pleased with its initial performance and will be looking for more such sites. Additionally, we carried out a number of extensions of stores, with 13 extensions of retail space and 18 extensions of warehousing space to cope with the growing volumes passing through the stores. We ended the year with 375 stores and a total of 10,835k square feet of retail space, growth of 3.0% on the start of the year.
Turnover grew by 4.1% to £13.0bn, a 6.0% increase after adjusting for the effect of a 53 week year in 2006/07. Like for like store sales increased by 4.6% with both customer numbers and average basket spend increasing.
As in the previous year, the strongest sales growth was achieved in Scotland and the South of England, but it was pleasing also to see growth in the Group's traditional Northern heartland after two challenging years. Our health and beauty department, revamped in 146 stores in 2006/07, showed growth, but not as much as we had aimed for. We are trialling a new, revised format which we believe will yield more positive results. Our home and leisure department showed good growth, albeit this was from CDs and DVDs at low margin. New, broader ranges will be introduced in the coming year. We continued to see strong trends towards customers choosing higher quality, more healthy food - with sales of our Eat Smart range up 35%, the Best up 25% and Organics up 14%.
Our forecourts business is important in attracting traffic to our stores, and we ensure that our pricing is highly competitive. Total litreage grew by 2.9%, a reflection of the traffic growth.
With the continued delivery of the Group's Optimisation Plan, first announced in 2006, profit growth significantly outstripped turnover growth. Gross profit increased by 29%, from £636m to £818m, reflecting the benefit of many initiatives detailed further in this Operating review. Administrative expenses have remained flat compared to 2007. Advertising activity has been significantly increased to support the rebranding campaign in the second half of the year, and these additional costs were offset by efficiency savings elsewhere.
After the cost of products, our two biggest costs are store wages costs and distribution costs. In both areas, we continued to make strides to improve our efficiency. Store labour productivity increased by 6% year on year, following a 14% improvement in the previous year. The cost to deliver each case through our distribution network reduced by 9.4% year on year, with not only financial benefits but also significant environmental benefits in terms of 3.4 million fewer miles travelled.
We were pleased, in the year, to win a number of important industry awards, reflecting great achievements of our colleagues throughout the business. Foremost amongst these were the Grocer Gold Awards for Service and for Availability, the National Recycling Awards for Best Supermarket Recycling Initiative Scheme and the International Wine Challenge with 147 Gold Commendations.
Optimisation Plan progress
Last year, having achieved our initial targets for cost reduction and margin improvement, I outlined a detailed programme for the next stage of development for Morrisons, with the overall aim of becoming the food specialist for everyone. I explained what we mean by this:
|Food Specialist||We really understand food...
...we know where it comes from
...we pack it and make it in our factories
...we make it in our stores
...we employ craft skills in every store
|For everyone||Great food which is also great value
Great food which is for every day, not just special days
We made good strides in the past year in building on our food specialist credentials. In many cases, this has been about showing more clearly to our customers the things that we already do. In some cases, too, we have needed to make improvements. Our meat is butchered the old fashioned way, in-store rather than in a factory, by highly-trained butchers. Much of our bread is freshly baked overnight and throughout the day, from scratch using flour, yeast and water. Our awardwinning fish bar is laid out fresh every day. Salads are chopped, sandwiches are made, pizzas prepared and cakes topped with cream. This local, fresh preparation, provides a real quality advantage, and was not necessarily being appreciated by all our customers. We introduced new packaging and labelling during the year which clearly shows the products that have been made in-store. And we are undertaking a programme to open up many of the areas of Market Street where food preparation takes place, so that customers can see at first hand what we do.
We previously had work to do to improve our product range. We made strides in the year, with an increase in range from 28,000 to 30,000 lines and the relaunch of over 8,000 lines in total. The work included the removal of all hydrogenated fats and significant reductions in salt, from our own label ranges. We launched a new range of healthy food for children called 'Kids Smart', designed to be delicious, nutritious and healthy. The fresh fruit in the range, for example, is carefully selected to include smaller, sweeter varieties of apple and pear. Our programme to tailor each in-store range more closely to the local customer base continued - for example we now stock a range of Polish products in over 100 stores, and we have successfully trialled local sourcing in a small number of stores. In our dialogue with our customers, we find that they strongly support British agriculture, and we are proud to reflect that sentiment by confirming that we will only stock fresh beef, pork and in-season lamb that is British. We are closer to source than any other major food retailer.
I outlined last year our plans to sharpen our image, with a programme to freshen-up our stores. The new look is rolling out through our estate, and by July 2008 the work will be complete. At this stage, all store exteriors and approximately 140 interiors have been completed. The programme covers the exterior and interior signage of the stores, our filling stations, our trucks and our Market Street counters. The total cost of the work will average less than £0.5m per store, reflecting the care that has been taken to ensure that the new design is cost effective. It has been well received by customers.
Being the food specialist for everyone means not just providing great products but also great value, and that has always been a strength of Morrisons. We were first to market with Spring Lamb, a wonderful product, sourced from British farmers at fair market rates and offered to customers at a price over 20% below competitors. A number of our Christmas products were rated very highly - our Christmas cake outscored similar products from competitors in taste tests, but at half the price of some. Griffith Park sparkling rosť, at £4.99, beat off many champagnes costing over £20 at the Effervescents du Monde awards in France. It was exclusive to Morrisons. This is what being the food specialist for everyone is all about - showing to our customers that great food does not have to be expensive food.
In support of the changes taking place in-store, we launched an advertising campaign in the second half of the year designed to attract new customers to come and try us. It placed emphasis on our in-store food production and our food provenance knowledge, which we know appeals to customers. We were pleased with the success of this campaign - it told customers things they did not know about Morrisons, and they liked what they heard. We welcomed many new customers into our stores towards the end of the year as a result and, very importantly, they kept coming back.
Our colleagues are vital to delivering our success - to be the food specialist for everyone demands a higher level of service and knowledge in our stores. We believe we are the largest employer of craft skills - butchers, bakers, fishmongers - in the country, and we have 25,000 people employed in producing the food that we sell.
Our 117,000 people are also our customers, and we were delighted to introduce a discount scheme for them for the first time, in November 2007. Given that the weekly food bill represents a significant part of household budgets, this is a key benefit for our staff. Our stability index, a measure of the proportion of our colleagues who have been with us for over one year, improved from 71.3% to 75.7% in the year. This is not yet high enough, and we will continue to implement initiatives to encourage our best staff to stay longer with us. We wish to invest in skills, and take out work where we can be more efficient. Our trials of 'self scan' checkouts were successful in the year, and we intend to roll these out to over 200 stores.
I was pleased to complete our senior management team during the past year, with the appointment of new HR, Marketing, and Home and Leisure Directors. Additionally, upon the retirement of David Hutchinson as Production Director we chose not to replace this main Board position, instead creating two separate roles - Manufacturing Director and Distribution Director, both promoted from within. The senior team has come together well around our Optimisation Plan agenda, and I am pleased that we now have a stable and complete team driving the leadership agenda.
The importance to society of large corporations acting responsibly is growing, and Morrisons is determined to play its full part. In 2007 we published our first Corporate Social Responsibility report, which highlighted our activities in this area and set out some ambitious targets for reductions in carbon emissions, energy usage and wastage.
We made good progress in many areas in the past year - overall carbon emissions were down by 25% on 2005 - 70% of the way towards our target of a 36% reduction. This has been achieved by installing new refrigeration in our stores, with less leakage of coolant, by training our colleagues to be more aware of energy efficiency, resulting in a 5% reduction in Group energy usage, and by beginning to re-equip our vehicle fleet with more efficient engines. Customers are concerned to contribute to the environmental agenda, and improved recycling disciplines can help greatly. In addition to providing recycling facilities at most of our stores, we launched an information campaign called 'Recyclopedia' last year. It seeks to inform customers, through simple graphics, of the recycling options available for the packaging concerned. We were pleased that this initiative won a National Recycling award.
In outlining our Optimisation Plan last year, I highlighted a number of areas where our infrastructure required further investment, in distribution, manufacturing and in systems. In distribution, we successfully opened a new grocery depot in Swindon to serve stores in the South and West, relocating the activity from Tamworth. This saved 2.9m miles of transportation and allowed us to sell the surplus depot. A new regional distribution centre at Sittingbourne, in Kent, is expected to open in 2010.
In manufacturing, the development of our new abattoir in Spalding continued, and it will open fully in the second half of 2008 - by that stage all our fresh beef, pork and in-season lamb will not only be British but also will be processed through our own facilities. We made progress in completing our chill chain through the manufacturing and distribution businesses, and all products that we wish to chill now arrive at the back door of our stores in chilled condition.
Our programme to replace all the major systems in the business got underway in 2007. The first stages involved hardware and software selection and the overall design of the new systems. The first major systems implementation will be a new Group HR and payroll system, which will go live in late 2008 and will be one of the largest and most advanced payrolls in the UK. Thereafter, the programme of systems renewal will run throughout 2009 and 2010.
The overall investment requirements for the Optimisation Plan, outlined last year, are £450m over and above normal capital investment, and the programme will run to 2010. In 2007 only £68m of this was incurred as many of the programmes were in the enabling stages, but investment will accelerate in 2008. We have not changed our estimate of the overall costs.