It was a year of transition, said David Potts, chief executive of Morrisons, referring to the grocer’s £7bn takeover by the US private equity firm Clayton Dubilier & Rice in late 2021. He could equally have meant the other significant change: Morrisons transitioned from fourth largest supermarket chain in the UK before the buyout barons took control, to fifth.
One can see in Thursday’s numbers how it happened. Aldi, the operator on the rise, opened a few stores but the critical contributor was the mighty 4.2% fall in Morrisons’ like-for-like sales last year. That was in a period in which virtually everybody else has been firmly in positive territory thanks to inflationary breezes.
Never mind, you might think, at least Morrisons was able to trumpet a profit of £828m for the 12 months to last October – “at the top end of guidance”, no less, even if the figure was 15% below last year’s. Well, yes and no. The £828m was of the “adjusted” variety before bad stuff such as £220m-ish of exceptional changes, some related to the subsequent purchase of the convenience retailer McColl’s. Actual operating profit was only £23m, which became a loss of £33m at the pre-tax level. There are no two ways about it: this was a weak financial result.
The open question is how much was self-inflicted – or inflicted by virtue of being shoved into a leveraged financial structure.
Potts referenced Morrisons’ vertical integration – half the fresh food is produced in-house – as a reason why the chain “felt the impacts of last year’s racing inflation more immediately than our competitors and this did have an impact on our pricing position”. That integration, obviously, would have been a feature even if the company had stayed on the stock market.
But it is less clear why Morrisons waited until last November to “turn up the gas” on price cuts. Was the delay because so much debt is sloshing around at a holding company level? Potts wasn’t going to admit that. On the other hand, it wasn’t entirely clear what he meant by “a slight shift in emphasis and priorities” post-takeover.
The better news – not least for CD&R – is that Morrisons was never a badly run business. Trading momentum seems to have picked up in the past couple of quarters. The chain expects top-line earnings to improve this financial year.
Yet the buyout, completed just before consumers were clobbered in their energy bills, was still spectacularly badly timed. The private equity firm paid a 62% takeover premium in a sector in which the leaders’ share prices have subsequently fallen by about a fifth. The riskiest slug of the takeover debt trades at 64p in the pound, according to analyst Clive Black at Shore Capital. CD&R’s eventual transition out of Morrisons already looks a long and a difficult haul.
