Morrison to cut costs

Related tags Safeway Morrisons

Wm Morrison plans to reduce prices on a further 2,000 Safeway
products over the next month as part of its move to slash prices
throughout the stores it acquired earlier this month.

The Bradford-based supermarket chain wants to cut Safeway prices by 6 per cent over the next few months, and has already cut prices on more than 800 basic items such as milk and butter. It hopes that the move will help it to halt Safeway's decline in underlying sales, which are 4 per cent lower than last year.

The price cut strategy, which analysts believe could trigger a full scale price war among UK supermarkets, is just part of a busy programme that will see store refits, closures and disposals in 2004. Although daunting, Morrison's strong financial position should allow it to navigate the tricky business of integrating Safeway stores into its network.

The company posted a strong rise in full-year profits last week, with like-for-like sales rising 9.7 per cent during the past six weeks. Morrison's shares rose 2.75p yesterday to a record 256p. The company also reported a 13 per cent rise in pre-tax profits to £320 million, despite absorbing £10.9m of bid costs.

Bob Stott, the joint managing director, is quoted in the UK's Independent​ as saying that the group was also close to offloading "one package"​ of the 52 Safeway stores it was ordered to sell by the Competition Commission. Four of the 52 will be the first to receive the Morrisons makeover, starting next month with Rippon in North Yorkshire.

Chairman Sir Ken Morrison has declined to reveal Safeway's bid costs, which are estimated to have been up to £50m. However, he did say that work on benchmarking own label products of Morrisons and Safeway was nearly completed, a move which he said would allow the company to "simplify the supply chain and maximise production efficiencies".​ He added that "the difficulty in obtaining information before 8 March 2004 [the date the takeover was completed] has been a handicap, but we are rapidly catching up with important details of the Safeway business"​.

Morrisons paid cash for its £3 billion acquisition of Safeway, and starts the process of integrating the business with a balance sheet completely debt free, apart from its usual overdraft facility, and cash in hand of £206.6 million - a strong position from which to start given the inevitable increase in capital expenditure this year. The group will also benefit from the proceeds from the sale of the 52 stores which it is obliged to offload, a further addition to its cash pile which should again help ease the cost of integrating Safeway.

Given Morrisons' traditional tight ship, it is unlikely that the refitting of Safeway's stores will have the same detrimental effect on sales as did the recent reorganisation at Morrions' closest rival, Sainsbury. The decision to revamp virtually the entire store portfolio in one go saw customers switch their allegiance to rival stores as a result of the constant upheavals, putting a major dent in Sainsbury's sales figures as a result.

And with any change at Safeway likely to be for the better, Morrisons should begin to feel the benefits extremely quickly, further narrowing the gap with Sainsbury whose third place in the retail rankings is looking increasingly under threat.

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