Morrison warns on profits as Safeway acquisition turns sour

WM Morrison's £3bn acquisition of Safeway in March has run into trouble, prompting a profits warning from the Yorkshire-based retailer with analysts wiping up to £200m off their full-year earnings forecasts.

WM Morrison's £3bn acquisition of Safeway in March has run into trouble, prompting a profits warning from the Yorkshire-based retailer with analysts wiping up to £200m off their full-year earnings forecasts.

The company said it had been forced to delay publication of its next set of results because of unstable accounting systems inherited from Safeway, and that its annual profits would be "substantially lower than current market expectations".

Sir Ken Morrison, the chairman, said the company had not been able to do detailed due diligence before buying Safeway. "This was one public company buying another in a share purchase," Sir Ken said. "We were not allowed, in the nature of the deal, to go in and examine the business."

Sir Ken said he and his management team had no experience of turning around large, declining assets but was confident that rebranding the Safeway chain and introducing the Morrison value-for-money proposition would woo customers back.

Sir Ken admitted he was not prepared for the impact of a Safeway pricing policy in the months before the acquisition was completed, and was also unaware of the level of non-food overstocking at the stricken grocery chain.

In the run-up to the deal completing, Safeway had been raising prices to try to protect its profits. However, this drove away customers and eroded volumes. As a result Morrison has been forced to change its own pricing strategy and introduce deeper price cuts in the Safeway stores more quickly. This will now reduce overall group earnings as a result.

"The impact of these price cuts was a further reduction in sales given the lagged response in volumes," Sir Ken said. Like-for-like sales at the Safeway estate are down 7.2 per cent.

In a litany of other problems Morrison has discovered 55,000 pairs of unsold Levi's jeans plus large numbers of mountain bikes and unsold wine.

Sir Ken also revealed that first-half income from the Safeway stores would now be reduced by £180m because of a change in supplier rebates.

Safeway relied in the past on upfront fees from suppliers in return for contracts, while Morrison has negotiated rebates from suppliers at the end of contracts. The Safeway stores are being moved on to the Morrison model but this will cut income by £180m in the short term.

Morrison also announced an overhaul of accounting systems within the enlarged group. Just one month before the completion date of the takeover, Safeway introduced a new accounting system that suffered installation problems.

The company said: "Morrison has had to face the double task of attempting to stabilise this new system and integrating the results with its own established systems. As a result of this additional work, Morrison anticipates reporting its interim results for the 25 weeks to 25 July in the second half of October rather than on 23 September as previously indicated."

The company said that, ignoring the problems with the Safeway stores, its core Morrison estate continued to trade well with an 8.1 per cent sales increase in the 21 weeks to 27 June on a like-for-like basis.

Sir Ken said the market share based on till-roll takings was down 7 per cent in the four weeks to 20 June compared with a 9 per cent decline in the four weeks before that.

Richard Ratner, a retail analyst at the broker Seymour Pierce, said: "While the core Morrison stores continue to trade well, the execution risk of acquiring Safeway, that we feared at the time of the merger, has occurred, impacting sales and profits substantially." Mr Ratner said he was now looking for profits for the year of £390m, down from £590m.

Sir Ken justified the deal as a property transaction rather than buying an ongoing business in its own right. "When we bought Safeway we bought it virtually as a property deal. What we wanted were the fixed assets and the planning permissions and existing stores. That's what we are trying to bring to fruition."