Morrisons to scythe staff costs but City fears the edge will be blunted

Analysts say supermarket chain is condemned to keep drifting until a new chief executive is appointed
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Troubled supermarket chain Wm Morrison will take an axe to staff costs this week as part of its revival strategy.

The "optimisation plan" will be unveiled on Thursday at Morrisons' annual results, which will show the group plunging further into the red.

It will detail how the company intends to increase sales and improve profitability, both of which have taken a battering since it spent £3bn on smaller rival Safeway two years ago, and could lead to the chain increasing the number of stores opened each year.

But the plan, led by recently installed finance director Richard Pennycook, will also focus heavily on staff and distribution costs.

With the Safeway acquisition, the headcount soared from 52,000 to more than 140,000, according to last year's annual report. Morrisons also has more staff than its rivals throughout its supply chain as its chairman, Sir Ken Morrison, has largely spurned automated systems. Many believe that employee numbers, particularly in smaller stores, will be cut.

However, an insider insisted that the group was trying to steer away from redundancies. "We have so many flexible and seasonable workers, we can adjust our workforce pretty well."

The group has already shut three depots, at a cost of around £60m, and a further reduction in capacity is expected.

Yet the plans are unlikely to go far enough to please the City, with management restricted in how much it can do to turn the business round until a new chief executive is in place. Current incumbent Bob Stott is due to leave by late summer, and a shortlist has been drawn up of internal and external candidates.

Internal possibilities include the managing director, Marie Melnyk, a non-executive director, Nigel Robertson - the former managing director of online shopping venture Ocado - and the store operations director, Mark Gunter.

Other names associated with the role include Asda's former boss, Tony DeNunzio, WH Smith's chief executive, Kate Swann, and Angela Spindler, Asda's customer and strategy director.

Most fear, however, that candidates are being deterred by the continuing presence of Sir Ken, 74. The forthright son of the founder has no plans to quit and remains closely involved with the running of the business. He is also known to favour hiring an internal candidate, although institutional investors are insisting that an external chief executive be sought.

Many fear that the company's progress will drift until the arduous recruitment process is complete. "I don't see how they can have an optimisation plan without a chief executive," said Philip Dorgan, a retail analyst at Panmure Gordon. "I know they had hoped to have one in place by now, but they haven't. It seems like putting the cart before the horse. It's also asking an awful lot from the finance director, because it's all about strategy and the chief executive decides strategy."

The chain, which issued five profit warnings last year, originally said that the results would come in between £50m and £150m. Although festive trading figures showed early signs of progress, Morrisons confirmed that pre-tax profits would be at the lower end.

Exceptional costs, such as the £60m incurred when it closed three depots, mean it is set to make a bottom-line loss of around £200m. At the half year, it recorded a £74m loss, the first in its 106-year history.

"The collapse in profitability has been as spectacular as it has been mysterious," noted Simon Proctor at Charles Stanley. "The market will be looking for convincing reasons as to why operating margins have fallen from 6.4 per cent in the year of the acquisition to just over the 1 per cent expected for this year."