Dalton Philips has faced a dilemma as chief executive of Wm Morrison since taking over from Marc Bolland in 2010. Does he take the traditional Bradford-based supermarket into online retailing?
After the Christmas trading update, it doesn’t really look like a dilemma any more.
Morrisons reported a 2.5pc drop in like-for-like sales for the six weeks to December 30, despite having an extra day of trading compared to the relevant period in 2011.
The Christmas figures are likely to be the worst from any of Britain’s big four supermarkets which also include Tesco (Other OTC: TSCDY - news) , Sainsbury’s and Asda and the worst from Morrisons since it tumbled into chaos in 2005 after buying Safeway (NYSE: SWY - news) .
New data from the British Retail Consortium highlights the split in the retail industry, with online sales rising well ahead of traditional retail sales.
Despite Tesco launching its website all the way back in 2000, Morrisons still does not sell food online, and has only 12 convenience stores.
This means that at Christmas, Morrisons had no access to the fastest-growing part of the retail market.
Given that Morrisons is already battling against most of its 455 stores being outside affluent London where it has a 6pc market share compared to 12pc in the UK as whole it is clear the company has a problem.
Some City analysts claim that Philips has also disenfranchised Morrisons’ core customers in Lancashire and Yorkshire by introducing a new focus on fresh food in stores, which includes vegetables resting on baskets of ice.
Freddie George at Seymour Pierce said: “Its fresh focus has perhaps taken the offer too far away from its traditional value roots and we are not convinced there is a fresh/craft differentiated niche to be carved out.”
This has been vehemently denied by Philips, who says sales in the revamped “Fresh Format” shops are up between 4pc and 6pc.
Whatever the success of the “Fresh Format”, however, it does not change the fact that Morrisons is significantly behind its rivals in the online and convenience segments.
According to Dave McCarthy at Investec (LSE: INVP.L - news) , if you strip out internet and convenience stores from Tesco and Sainsbury’s, their core stores are also suffering a 3pc to 5pc decline in sales. “You can’t argue the maths,” Philips says.
The Morrisons boss has already pressed the button on expanding the number of Morrisons convenience stores. By the end of 2013, there should be around 70 “M-local” stores in the UK.
After the slump in Christmas sales, Philips also now seems closer than ever to launching a food website. This could potentially be as a trial in London initially.
Philips said he is looking “very closely” at selling food online and pledged to offer more information at Morrisons’ final results in March.
“The most important thing is that you have a strategy and a plan that gets you to where you want to go,” he said.
So what has taken so long?
The reason that Morrisons has not yet launched an online business and still might not in the future goes to the heart of the structural issues facing the supermarket industry.
Put simply, selling food in a traditional supermarket is more profitable than selling it in a convenience store or online. Industry estimates are that each online delivery costs the supermarket £15 per customer, and the capital-intensive nature of online grocery retailing has been demonstrated by the struggles of Ocado.
So, while the lack of an online presence is hurting Morrisons sales, it is doing less damage to profits.
The City is forecasting full-year profits for Morrisons of around £900m. In contrast, Sainsbury’s, which has a bigger market share, is forecast to deliver £800m.
Philips says shareholders are backing his strategy, but the Christmas sales figures make one thing clear it’s time to make a crucial decision about Morrisons’ online future.