Trading conditions for Morrisons have been tough, with the retailer having to contend with limited market growth, discounters’ unabated roll out of new space and Tesco gaining momentum. Nevertheless, the retailer has recorded a solid set of results during its first half.
Of course the results need to be viewed in the context of soft comparatives and the continuing underperformance of Asda which will no doubt have worked in Morrisons’ favour. Also, increasing online sales will have contributed to the performance.
Despite progress, Morrisons is far from out of the woods. Further price cuts will be required (especially as Asda sets out to re-establish its price authority), putting pressure on its gross margin. So far operating profits have been protected by cost cutting, and there are more cuts to come. However these are one off wins – and of course there is a fine line to tread if customer service and availability levels are to be maintained.
As for Morrisons’ relationship with Amazon, we believe it’s far too early to say whether this is a strategic masterstroke. The deal will deliver jam today, but we expect Amazon to be a seriously disruptive force in the UK grocery market over the next decade and beyond. It is risky for any retailer to support the launch of a potentially powerful competitor.