Jeremy Warner's Outlook: All is hubris as Sir Ken flounders on the ice

Groceries confusion; Savings gap myth
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The Independent Online

My, what a busy bee David Jones, the chairman of Next and now deputy chairman of Wm Morrison Supermarkets, must have been these past few weeks. What with the implosion going on at Morrisons, it's a wonder he had any time left at all for Next, where in the past seven weeks, like-for-like sales have fallen 3.5 per cent. This is mainly the result of cannibalisation, insists Mr Jones, and therefore planned and foreseen, rather than there being anything fundamentally wrong with the business. As Next pushes further into larger scale outlets, it takes away sales from pre-existing ones.

My, what a busy bee David Jones, the chairman of Next and now deputy chairman of Wm Morrison Supermarkets, must have been these past few weeks. What with the implosion going on at Morrisons, it's a wonder he had any time left at all for Next, where in the past seven weeks, like-for-like sales have fallen 3.5 per cent. This is mainly the result of cannibalisation, insists Mr Jones, and therefore planned and foreseen, rather than there being anything fundamentally wrong with the business. As Next pushes further into larger scale outlets, it takes away sales from pre-existing ones.

Cannibalisation is also one of the reasons cited by Sir Ken Morrison for the spectacular deterioration in the affairs of his eponymous supermarkets group. Forget the ill-fated Safeway acquisition, like-for-like sales are now falling even in the core Morrison stores. Excluding petrol, they were down 1.2 per cent in the six weeks to 13 March. According to Sir Ken, as with Next this is in part a cannibalisation issue. As the Safeway stores are converted to the Morrison format, they take sales away from existing Morrison stores nearby.

Yet try as he might, Sir Ken cannot explain away the disaster that has befallen Wm Morrison since acquiring Safeway just over a year ago. "The task of conversion has been challenging", Sir Ken said yesterday with masterly understatement. And then in what can only be described as self delusion: "I believe we have made good progress".

It's still possible to believe that Sir Ken might eventually make the Safeway acquisition work. If he can achieve the same high margins in the Safeway stores as he does at Morrisons, then profits ought logically to skyrocket. Yet without the footfall, the margin gets ever harder to earn, and even in the converted stores, the customers aren't exactly queuing down the aisles to get a taste of the Ken Morrison experience. The formula just doesn't seem to work as well down south as it does up north.

Yesterday's boardroom shake-up was frankly fiddling while Rome burns and will do little to correct the underlying problem. Martin Ackroyd, the finance director, is thrown to the wolves in punishment for the two profits warnings that have been issued since the takeover - or is that three or four? Bob Stott steps up from joint managing director to become the company's first ever chief executive, and David Jones becomes deputy chairman. Mr Jones, the mastermind behind the renaissance at Next, is as tough and accomplished a retailer as they come, and if anyone can get a grip on affairs, then he can.

Yet even for him, it's going to be an uphill struggle. Duncan Davidson, the other non-executive director and in his own field of housebuilding an equally impressive heavy hitter, flounced out yesterday saying he hadn't realised quite how much time the job would consume. The unspoken story is that he simply couldn't take Sir Ken's cavalier attitude to corporate governance a moment longer. The key point is that Sir Ken remains executive chairman, and together with Mr Stott, he will presumably continue to run the business in the way he always has.

For Sir Ken, 73, the Safeway takeover is turning out to be classic case of hubris. I have to confess to fully supporting the takeover at the time, believing that the creation of a viable fourth force in national supermarkets would be good for consumer choice and good for competition. Yet so far, Morrisons has made a hash of it and you cannot help but feel that if there had been any non executives on the board prior to the takeover, they would never have allowed Sir Ken to embark on this folie de grandeur. As a hugely successful regional retailer, newly knighted and newly married, Sir Ken started to believe his own script and plunged into a takeover which, on present form, suggests he was never up to.

It is not yet certain that Sir Ken's hubris will end in his own nemesis, but it's beginning to look that way. Post the Safeway takeover, Sir Ken's family stake has been diluted to just 18 per cent, which is a long way from being the controlling position he once had. Sir Ken isn't the sort for regrets, yet he must be cursing himself for not staying loyal to his Yorkshire home. The City is an unforgiving and impatient taskmaster. Unfortunately for Sir Ken, things are all too likely to get worse before they get any better.

Groceries confusion

Still, at least Sir Ken has managed to leave Somerfield nursing the headache of a Competition Commission reference over the 114 stores Somerfield bought from Morrisons last November. Somerfield acquired the stores unconditionally, which means that if the Competition Commission disallows the change of ownership, they don't all come bouncing back on to Morrison. Somerfield professed "disappointment" at the decision yesterday, but it cannot pretend to be much surprised.

Beyond changing the name on the shopfront, Somerfield hasn't invested a penny in the stores affected by the decision, because it knew there was a chance of reference. The Competition Commission has set out a painfully precise method for determining monopoly in grocery retailing, involving average driving times between rival supermarket outlets to establish whether there is adequate local competition. Twenty-three of the stores bought by Somerfield fail the "isochrone" test.

In other respects, however, the attitude of the competition authorities towards the grocery trade is about as clear as mud. The Office of Fair Trading blissfully allows the giants of food retailing - Tesco and Sainsbury - to extend their reach into convenience stores via takeover, yet it doesn't allow Somerfield, a relative minnow, to acquire a piffling portfolio of 114 stores. No one else can see the distinction, yet the OFT is determined to view supermarket and high street retailing of groceries as separate markets, never mind the fact that Tesco and Sainsbury use their buying, distribution and marketing power to drive sales in both, thereby forcing the smaller independent out of business.

The OFT largely gave the supermarkets a clean bill of health this week over the fairness with which they treat their suppliers. Again, few would recognise these conclusions. Supermarkets have on the whole been extremely good for consumers, bringing lower prices and greater choice. Yet we are perilously close to a tipping point where the benefits begin to get outweighed by the destruction of small, localised competition in the supply of food and other goods.

Confusion reigns as to how competition regulators might address these concerns. Self-evidently, the way not to do it is to allow companies with already very substantial shares of the groceries market to buy up the high-street convenience trade on the grounds that this is a "new" business for supermarkets. Sometimes it seems the OFT is utterly brain dead.

Savings gap myth

One of the most commonly believed myths of our time is that nobody saves any longer. According to figures published by the Office for National Statistics yesterday, the savings ratio in fact averaged a little over 5.6 per cent of disposable income last year, which, though a bit below its long-run average, is a good deal higher than it's been at various points in the past.

Indeed, people's propensity to save is determined almost entirely by the ups and downs of the economic cycle. In good times, people save relatively little; in bad times they save a lot, a phenomenon Keynes referred to as the paradox of thrift, whereby a recession is made worse by a refusal to spend. If there is something structural about recent comparatively low rates of saving, there are two possible explanations. One is that people may have become confident of indefinite macroeconomic stability.

But possibly the more important explanation is the democratisation of credit, which far from being the time bomb of popular demonology, is in fact a comparatively benign influence. The purpose of saving is to safeguard against a rainy day. If you know you can borrow money cheaply and easily, you don't need to save as much. Thrift is good, but you can always have too much of a good thing, and right now the balance seems about right.

jeremy.warner@independent.co.uk

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