Morrisons' recovery plan - Go back to the future

By James Davey

LONDON (Reuters) - Morrisons needs to return to its fresh food roots and shout louder about its craft skills and locally-supplied produce if it is to compete with discounters and give itself a fighting chance of reviving its fortunes.

New Chief Executive David Potts started at Britain's No.4 supermarket group on March 16, described by Morrisons' chairman and former Tesco colleague Andy Higginson as the best retailer he had worked with in 25 years in the industry.

So no pressure then.

In Potts' favour as he tries to reverse years of profit decline and market share losses, Morrisons has a ready-made blueprint for success -- fresh food supplied by company-owned farms, abattoirs and plants that is sold in-store by an army of 6,000 trained butchers, bakers, fishmongers and greengrocers.

That's the model which delivered for Ken Morrison, the son of the company's founder, in its glory days of the late 1990s, and which got muddled by a flurry of new initiatives under Potts' predecessor Dalton Philips.

But the market has changed in the last 15 years, with discounters Aldi and Lidl eating into Morrisons' core customer base in northern Britain, and a growing number of shoppers buying groceries online or in convenience stores.

"The UK has moved on since Morrisons' heydays: hard discount has taken over the mantle of old Morrisons," said Bernstein analyst Bruno Monteyne, a former senior Tesco supply chain executive, who forecasts a further halving of Morrisons' profit in its 2015-16 financial year.

"With Tesco clearly targeting the value end of the market, Lidl improving quality and even (No. 3 player) Sainsbury's going towards a medium-low price promise, the position for Morrisons is getting ever more squeezed."

That means Potts may have to go further, perhaps by giving store managers at its 514 core supermarkets more autonomy to adapt to local needs, perhaps by cutting back on product ranges to better compete with discounters.

Putting more staff into stores at busy times such as weekends and more consistent pricing as part of the 1 billion pounds ($1.5 billion) of price cuts already promised over three years are other options he may pursue, analysts believe.

After a 29-percent plunge in Morrisons shares in the last two years, some investors think it is worth a gamble.

"We believe Morrisons is an attractive recovery story," said Richard Colwell, equity fund manager at Threadneedle, which with a 4.98 percent holding is the supermarket's fourth-largest institutional investor according to Reuters data.

"MARKET STREET"

To thrive in Britain's cut-throat supermarket industry, Morrisons needs to differentiate itself from bigger rivals Tesco, Asda and Sainsbury's, as well as better-performing competitors such as the discounters and upmarket chain Waitrose, analysts say.

Philips' mistake in his five years at the helm, they argue, was to try to be everything to everyone -- expanding upmarket ranges, general merchandise ranges and then belatedly moving into convenience stores and online before eventually seeking to take on the discounters over price.

The result was three straight years of underlying profit decline and a drop in Morrisons' UK market share to 11.0 percent in March 2015 from 12.3 percent in March 2012, according to researchers Kantar Worldpanel.

At last year's annual shareholder meeting, Ken Morrison, who led the firm for nearly half a century before stepping down in 2008 and whose wider family still own almost 10 percent of its equity, described Philips' strategy as "bullshit."

But in an environment where shoppers are increasingly focused on the provenance of their food, some analysts think Morrisons still has a strong hand to play.

The company is unique among Britain's major supermarkets in making half of all the own brand and fresh food it sells.

Higginson, while giving Potts a "carte blanche", has signalled he would like to see more emphasis on the fresh food "Market Street" style that characterised the firm's heyday.

"Within the core of the business at that stage was a sort of quirkiness and individuality and an intuitive understanding of what customers wanted that gave it great strengths. That's what we need to return to," he said.

Just two weeks in, Potts, who started as a shelf stacker in a 38-year Tesco career, has axed five executives, scrapped the queue management system in stores, launched a campaign for shopper and staff feedback, announced plans to work in a store in April and told other head office staff to do the same -- and spent 1 million pounds buying Morrisons shares.

But he has some big decisions to make on convenience stores, online and the future of Morrisons' loyalty card.

The firm has paused its convenience roll-out, saying it needs to find better sites and improve its customer proposition. In online, Morrisons is one-year into a 25-year distribution deal with Ocado and though it claims industry leading service levels an annual sales run rate of about 200 million pounds is tiny in the overall scheme of things.

Still, Ken Morrison is hopeful Potts can deliver. Asked by Reuters what he wanted Potts to do, he replied with typical Yorkshire bluntness: "Double the share price."

(This version of the story corrects duration of price cuts to three years from five in paragraph 10)

(Editing by Mark Potter)