Chief Executive's business and strategy review
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Business and strategy review
2011/12 was another good year for Morrisons. Against
the backdrop of a difficult environment for the consumer,
our unique fresh, quality and value offer made Morrisons
a natural destination and more customers visited our stores
than ever before. We continued to improve our financial
performance whilst investing for future growth.
Total turnover was £17.7bn, an increase of £1.2bn (7%).
Our store sales (excluding fuel) grew by 3.9% to £13.4bn,
with a record 11.4m customers coming into our stores each
week. Sales from new stores contributed 2.1% of our total
growth. Like-for-like sales grew by 1.8%, customer numbers
were up by 1.3% and average basket spend up 0.6%. Whilst
sales growth was strongest in London and the South East,
we were pleased with our sales performance in all regions
of the country.
For the second year in a row, consumers were faced with
increases in the price of oil, exacerbated by ongoing Sterling
weaknesses. With unleaded prices at the pump up by 15.4p
per litre and diesel increasing by 18.5p, motorists were paying
an average of 15% more per litre at the pump than they
did last year. The demand for fuel is relatively inelastic
and, whilst motorists continue to use their cars in times of
austerity, they take time to shop around for the best deals,
such as our 'Fuel Brittania' programmes. As a result,
our volume sales increased by 4.8%. Overall, like-for-like
fuel sales were up 18% in the year.
Inflationary effects took their toll on disposable incomes during
the year, with the unwelcome impact of high oil prices feeding
through, not just at the petrol pumps, but also throughout the
supply chain. Other core commodities increased in price too,
adding to the pressure. Market prices for beef and lamb rose
by 15% and 11% respectively over the year, and average wheat
prices were up by 32%.‡ The increase in fuel prices alone
reduced our customers' disposable income by some £600m,
income that could otherwise have been spent in our stores.
In this environment, consumers looked around for value and
found it at Morrisons, where our sharp pricing, supported
by innovative promotions, was welcomed by customers.
We maintain a prudent approach to adding new space to our
estate and only approve investments that meet the required
financial hurdle rate. As a result, our space opening programme,
whilst being ahead of our published targets, was less, in relative
terms, than our major competitors. Despite this, with good
like-for-like sales, we maintained our market share.*
Throughout the year, we noted the rise of the 'professional
shopper', with customers taking time to shop around and look
very carefully at pricing and offers in order to search out value.
This trend played to Morrisons strengths. Our value proposition
of everyday low prices, coupled with industry leading offers,
and the flexibility of our vertical integration enabled us to meet
our customers' need for great fresh food at affordable prices.
Offers such as our 49p produce deal and our two loaves of
bread for £1 promotion helped our customers manage on tight
budgets. The market remained highly promotional, and our
innovative promotions such as 'Pay Day Price Crunch' and
'Morrisons Millions' really caught the mood of the nation.
A clear strategy is in place that
is delivering our objectives
The strategy we have pursued, and the investment choices we have made,
have set our business up to produce sustainable rates of growth.
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Gross profit grew by 6% to £1,217m during the year. The gross
profit margin was 6.9%, a fall of 10bps against last year due to
the increased proportion of low margin fuel sales in the mix this
year. After cost of goods sold, the Group's two largest cost areas
are store wages and distribution costs. We continued to manage
costs and improve efficiency in both areas whilst maintaining
excellent standards and customer service levels. As a result,
we again improved our store labour costs relative to sales,
with in-store labour productivity up by 2.9%. Distribution
productivity improved by 4.3%, reflecting the benefits of the
investment we have made in systems improvement.
Other operating income grew by 8% to £86m, primarily because
of increased recycling credits.
Administrative expenses increased by 2%, well below the rate
of profit and sales growth in the year. This reflects the strong
cost control culture that exists throughout the business.
Although the operating margin of 5.5% was in line with the prior
year's, the underlying result was an improvement of 20bps, after
adjusting for the increased proportion of low margin fuel sales.
The UK grocery market continues to operate in a very tough
economic climate, with consumer confidence close to record
lows during the year. In 2011, the market was worth £97bn,
up by 4.2% on the previous year.* Whilst this appears to
be solid growth, it should be noted that space growth was
approximately 4%, a historically high figure. Within these
figures, online grocery grew disproportionately, with 17%
of UK adults buying food or groceries online, up from 10%
three years ago. The convenience market, which is measured
separately, grew 4.6% to £34bn in 2011, and is expected to
continue growing at a faster rate than the traditional grocery
market for some time to come.♥
Retail grocery volumes were flat in the year and it was inflation,
averaging 5.5% through the year, which drove growth. CPI
food inflation, as measured by the Office of National Statistics,
was above 6% for much of the year but started to come
down through the last quarter, reaching 3.4% in January 2012.
Categories that saw particularly high inflation include oils
and fats (10%), coffee and tea (10%), and meat (6%).‡
Value at the forefront of shoppers' minds
Household incomes were squeezed throughout 2011, due to the
previously mentioned commodity and energy price pressures, and
also as a result of the Government's fiscal measures, particularly
the rise in VAT to 20%. Cost pressures ran well ahead of wage
settlements, with the result that disposable incomes overall
fell 2.3% in 2011. A general unease about current and future
expectations for the economy and for personal finances
also saw shoppers managing more closely to a budget.
As a result, pricing and overall value have become increasingly
important factors in purchasing decisions. More shoppers now
regard price as their first consideration when choosing between
products, compared with a year ago, with almost seven out of
ten now saying they make the majority of their grocery shopping
decisions before they get to store. This is an increase of 40% since
2008. Promotions are increasingly important when shoppers
are deciding which stores to shop at and what products to buy.
70% of shoppers say promotions play a very important role in
determining which stores they shop in, compared to 64% of
shoppers in December 2010.† The grocery retail market has
responded to these customer needs through an increased weight
of promotional activity on branded goods. Additionally, retailer
own brand sales, which carry a lower average unit price, have
been performing more strongly than branded products as
shoppers look for ways to manage their expenditure.
† Source:IGD ShopperVista
* Source:Kantar World Panel
‡ Source: ONS/Economic & Fiscal Outlook, OBR, November 2011
In 2010, we outlined our vision to make Morrisons 'Different
and Better than Ever'. We are proud of what makes us different - a distinctive offer to customers centred around fresh food,
craft skills and vertical integration through our manufacturing
business; the way we lead and support our colleagues; and our
unique heritage. Being 'different' means building on these
advantages, which set us apart from all our competitors and
position us to win. Being 'better than ever' is about improving
the way we do business - doing more of the things that matter
for our customers - making great food, offering outstanding
service and being more efficient so we can pass on the best
savings possible. It also means seizing opportunities to grow
the business profitably through new formats, channels and
categories, to meet more of our existing customers' needs
and to reach new customers.
We have developed a clear set of strategic objectives to deliver
our vision and strategy, these along with our 2011/12 initiatives
are set out from our homepage. KPIs and the risks to achieving our vision
are set out in our KPI section.
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