Morrison Ends Space Race as Bets Future Is on Online

William Morrison Supermarkets Plc plans to spend less building new supermarkets as the smallest of the U.K.’s top four grocers focuses on catching its peers by selling more online and in convenience outlets.

The company will almost halve its capital expenditure to 650 million pounds ($1 billion) annually after fiscal 2015, Morrison said in in a statement today after posting half-year earnings and sales that missed analysts’ estimates.

“The extent to which peers respond to Morrisons space rationality remains a major swing factor,” wrote James Grzinic, an analyst at Jefferies in London, in a note to clients today. “Still, the group is demonstrating a level of discipline currently absent in other quarters.”

Morrison shares rose 1.8 percent to 302.5 pence in London, the biggest jump since Aug. 23. The company, the last of the nation’s major grocers to go online, plans to regain market share and boost sales by starting an Internet service in January with the help of web grocer Ocado Group Plc. Morrison plans to have 100 convenience stores by the year-end.

The grocer misses out on 2 percentage points of sales growth by not having an online presence or convenience outlets, Chief Executive Officer Dalton Philips told journalists today.

“This sector, not just us, is in a negative position in bricks and mortar because of the headwinds of online and convenience,” Philips said.

The company is also reviewing options to unlock value from the company’s existing 9 billion-pound property portfolio and will update investors in March, he said. Morrison is maintaining a “progressive dividend policy” and moving toward a target of two times cover, he said.

Dividend Policy

Returning freed up cash to shareholders “is a shift that many investors have wanted to see at Morrisons for years,” Citigroup Inc. analyst Pradeep Pratti said in a note to investors. “However, this move by Morrison is delivered at a time when top-line momentum is lacking and cash generated by operations is falling short of expectations.”

Underlying pretax profit fell 10 percent to 401 million pounds in the period ended Aug. 4, the Bradford, England-based company said, below the median 406.5 million-pound estimate of eight analysts. Sales at stores open at least a year fell 1.6 percent, more than the 1.4 percent decline predicted by seven analysts.

Morrison’s decision to open fewer big supermarkets and bank on online and convenience store for future growth follows the lead of the U.K.’s largest grocer Tesco Plc, which in April said it will scrap 100 major store developments and wrote down the value of the sites that were acquired five to 10 years ago by 804 million pounds.

Aldi, Lidl

Morrison’s sales in the 12 weeks to Aug. 18 rose 1.8 percent, less than half the 4.1 percent grocery market growth in that period, according to figures from Kantar Worldpanel. Morrison’s market share in that period dropped to 11.3 percent from 11.5 percent the previous year.

Shoppers are defecting to discounters Aldi and Lidl or upmarket Waitrose in a polarization of buying habits. Waitrose today announced a same-store sales increase of 6.9 percent in the first half of the year, while Ocado said gross sales in the 12 weeks to Aug. 11 increased 16.4 percent.

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