March 13 (Bloomberg) -- WM Morrison Supermarkets Plc is one of only two major British grocers not proven to have sold horsemeat mislabeled as beef this year. Even that -- a big advantage with tainted meat dominating headlines -- has done little to halt a market share slide for the company.
Two years into a push to remodel stores and emphasize fresh produce, Britain’s No. 4 supermarket chain is losing price-conscious buyers to Germany’s Aldi and online shoppers to bigger rivals like Tesco Plc and J Sainsbury Plc.
While Morrison’s meat sales have risen slightly in recent months, its share of Britain’s 163 billion-pound ($242 billion) grocery market fell 0.4 percentage point in the four weeks ended Feb. 17, according to Kantar Worldpanel data obtained by Bloomberg News. Over the past year, its stock has dropped 11 percent while Sainsbury, the other grocer to escape unscathed, is up 15 percent.
“We would have expected Morrison to be one of the beneficiaries last month,” said Barclays Capital James Anstead. The horse-meat saga “should be playing to Morrison’s strengths.”
The company is expected to report its first profit decline in six years when it posts annual results tomorrow. Analysts expect pretax profit to slip to 889 million pounds from 947 million pounds, according to the median of 12 forecasts in a Bloomberg News survey.
Chief Executive Officer Dalton Philips aims to turn the company around with an emphasis on fresh produce. After Philips became CEO in March 2010, he vowed to lure recession-wracked customers away from tonier chains like Waitrose, part of John Lewis Partnership Plc, and J Sainsbury Plc with lower prices, more attractive stores, and an expanded presence in the south of the U.K.
“This year is a make or break” for Morrison, said Bryan Roberts, an analyst at Kantar Retail.
To trumpet the shift, Morrisson has hired comedy duo Ant & Dec, who have made a career out of convincing unsuspecting victims to eat oddities such as cricket biscuits and pig brains. The bits feature Anthony McPartlin and Declan Donnelly gamboling around the British countryside with a Morrison butcher, noting that the chain’s fresh meats are “100 percent British,” perceived as a dig at competitors like Tesco struggling with the fallout from equine-tainted burgers made from imported meat.
Morrison’s roots lie in Northern England’s former industrial heartland. The company was founded in Bradford, West Yorkshire, in 1899 as a market stall by egg-and-butter merchant William Morrison. In 1961, Morrison’s son, Ken, opened the first in what has grown to a chain of 489 supermarkets across Britain. The company went public in 1967.
Philips has so far remodeled about 100 outlets with in-store butchers, fishmongers, cheese counters and produce presented in wooden crates and baskets. Under the plan, Morrison sources almost half its fresh food directly from farmers and processes it in its own facilities. U.S. chain Kroger Co. has gained market share with a similar approach.
By cutting out middlemen, Morrison has avoided European suppliers that added horse meat to beef products sold by Tesco, Aldi, Ikea, and Yum! Brands Inc.’s Taco Bell chain.
Philips’s changes have alienated core customers in the north of England without attracting substantial numbers of new ones in the south, said Clive Black, an analyst at Shore Capital in Liverpool.
Longtime shoppers are now “faced with this visually beautiful merchandise -- cupcakes and bunches of lemongrass -- that is not what they are about,” Black said. “Morrison’s strategy is right, but it moved too quickly.”
Morrison says it has been “very conscious” of keeping prices low enough for its core shoppers. The company declined to make Philips available for an interview.
In November the company ousted Commercial Director Richard Hodgson after blaming declining revenue on a lack of shopper understanding of its new offerings. That hasn’t silenced detractors, a group that includes Ken Morrison, who criticized management for “neglecting the core business” with the upmarket push, he told the Sunday Telegraph last year.
The chain has also failed to follow shoppers as they move beyond the supermarket to the Web and to smaller stores. Online grocery sales in the U.K. will double to 11.1 billion pounds by 2017, according to the Institute for Grocery Distribution, while the convenience-store market will expand by 29 percent over the same time period, faster than the 18 percent growth expected from the broader sector.
So far, Morrisons’ only move online has been buying a 10 percent stake in U.S. Internet grocer FreshDirect. Morrison plans to unveil its U.K. online strategy tomorrow.
Philips has damped expectations of immediately going head to head with Tesco and Sainsbury. If a retailer can’t charge a premium for picking and delivering the goods, “you can end up subsidizing your online shopper by charging your core customer more,” he said in a March 4 interview with BBC Radio 4.
The company is also expanding a fledgling convenience store business called M local. Last month, it bought 60 stores from collapsed retail chains Blockbuster, HMV Group Plc and Jessops Plc, and it plans to turn them into neighborhood shops.
By contrast, Tesco opened its first convenience store in 1994 and now operates almost 1,500 of them. Sainsbury has more than 500 small shops and plans to open between one and two a week this year.
The push onto the Web and into smaller stores presents a dilemma for Morrison, said Richard Black, who helps invest about 400 billion pounds at Legal & General Group Plc, the biggest manager of U.K. pension assets, which holds shares in British retailers via index funds.
Supermarkets “are being cannibalized by online and convenience, both of which provide lower returns,” Black said. “If they don’t offer online and convenience, customers won’t shop there - so what should they do, lose market share or cannibalize their stores?”
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