Morrisons moves into convenience stores and online

Morrisons is to launch its first convenience stores and enter the online grocery market next year, its new chief executive said yesterday as he unveiled a 14 per cent jump in interim profits at the supermarket group.

Dalton Philips also revealed that the UK's fourth-biggest grocer is considering acquistions to expand in the convenience sector.

In his first outing in front of the City since joining Morrisons in March, the Irishman unveiled a raft of new initiatives to deliver top line growth, improved efficiencies and exploit growth opportunities, but he delayed setting out his strategy for non-food until a more detailed review in March.

Most City analysts gave him a cautious thumbs-up, but those at Oriel Securities said they were "uninspired". Mr Philips – who joined the grocer from the Canadian retailer Loblaw after his predecessor Marc Bolland took the helm at Marks & Spencer – said it would launch three convenience stores, sized under 3,000sq ft, in the first half of next year.

He said that Morrisons' strong balance sheet means it "can grow organically or we can go out and acquire" in the convenience market – which is growing at twice the pace of the wider grocery industry.

Of the 48,000 convenience stores in the UK, the multiples, such as Tesco, Sainsbury's and the Co-operative Group, only represent 6 per cent of the market. Mr Philips said: "I see a real opportunity in this market."

But Morrisons will have to play catch-up with its rivals. Tesco already has 1,643 UK convenience stores, including its One Stop chain, the Co-operative Group has 2,016 and Sainsbury's has 335. The market is also populated by Marks & Spencer Simply Food and, more recently, Waitrose.

For the half-year to 1 August, the Bradford-based grocer delivered total sales up by 9.1 per cent to £8.1bn, while underlying profits rose 14 per cent to £410m.

Morrisons will also take on Tesco, Sainsbury's, Asda and Ocado by starting a "limited trial" of online grocery next year in an unspecified area. IGD, the food industry's trade body, estimates that online spend on groceries and food will nearly double to £7.2bn by 2014. Mr Philips said: "We need to understand how to respond to this growing market," but stressed that online grocery has "got to be profitable" and must not lead to higher prices in stores for its 11.1 million weekly shoppers.

Among a raft of other initiatives, Mr Philips vowed to grow Morrisons' £6bn own-label business and reduce duplication in its ranges and promotions. He criticised as "confusing" that Morrisons had sold 16 different balsamic vinegars and had nine teas on promotion.

Morrisons will also invest £200m over the next three years in, and expanding, its food production, which will lead to a £50m increase in earnings before interest, tax, depreciaton and amortisation over the period.

Crucially in a market of wafer-thin margins, Morrisons grew its operating margin by 10 basis points to 5.2 per cent in the first half.

Over the first half, Morrisons posted like-for-like sales, excluding VAT and fuel, up by 0.9 per cent. This represented an improved performance of 1 per cent growth in the second quarter, following a 0.8 per cent rise in the previous three months. But Mr Philips warned of "low market growth" in the second half of the year, as the consumer remains under pressure. He said: "The average consumer has £80 a month less than they did one year ago."

He added that higher petrol prices and fuel duty means its customers had £240m less disposable income in the first half.

Richard Pennycook, Morrisons finance director, warned that "food prices continue to firm", adding that the long term trend of food expenditure falling as a proportion of GDP has come to an end.