AN EVALUATION OF THE BUSINESS AND FINANCIAL PERFORMANCE OF WM MORRISON SUPERMARKETS PLC BETWEEN 31ST JANUARY 2005 AND 3RD FEBRUARY 2008 A RESEARCH AND ANALYSIS PROJECT FOR THE B. Sc (HONS) IN APPLIED ACCOUNTING CONTENTS PAGE PART 1 – Project Objectives and Overall Research Approach. 1. Reasons for choosing the project topic 2. Project objectives and research questions 3. An explanation of research approach. PART 2 – Information Gathering and Accounting/ Business techniques. 1. Sources of information from which relevant data were obtained. . Description of the methods used to collect information, including online access. 3. A discussion of the limitation of my information gathering. 4. Identification of any ethical issues that arose during your information gathering and how they were resolve. 5. An explanation of the accounting and/or business techniques used, including a discussion of their limitations. PART 3 – Results, analysis, conclusions and recommendations. Description of results obtained and any limitations 1. Critical analysis/evaluation of results which include an xplanation of significant findings. 2. Conclusions about research findings and how well project objectives and research questions have been met 3. Appropriate recommendations on specific courses of action to identified individuals within WM Morrison’s. PART 1 – Project objectives and overall research approach. Introduction WM Morrison’s Supermarkets Plc, popularly known as Morrison’s is the fourth largest grocery retailer in the supermarkets chain sector in the United Kingdom with 12. 1% market share. It is also the second largest by market capitalisation.
The UK supermarket sector is dominated by Tesco, Asda, Sainsbury’s and Morrisons which are the only chains which operate full-scale superstores of 40,000 square feet (3,700 m? ) or more. The “Big 4” have a combined share of around 75% of the UK grocery market according to retail analysts TNS Worldpanel. (groceryweb. co. uk). The UK grocery retailing market was worth ? 134. 8bn in the 12 months to May 2008, up 4. 1% on the previous year. Morrison’s was founded in 1899 by William Morrison in Bradford, England. For several years it focused its services to the north of England.
The company was able to revolutionise it spread and outlook with its takeover of Safeway another leading British supermarket chain in 2004. This strategic takeover has enabled Morrison’s to extend its services to the south of England and all over the United Kingdom and Ireland. It currently has a total of 382 superstores across the UK. Ken Morrison, son of William Morrison took over the helm of affairs in 1952 at an early age of 26. Sir Ken Morrison currently holds the position of President of the WM Morrison’s Supermarkets Plc. The company is listed on the London Stock exchange and is in the prestigious league of FTSE 100 companies.
The performance of any company is critical to its survival. Performance is usually looked at from the point of view of the business and financial situation of a company. Consequently, it is very beneficial for companies to conduct a regular review of its business and financial performance. Business and financial performance of an entity are two distinct but extremely interdependent indicators of success or otherwise. Business performance can be assessed with reference to market share, industry position, competitor activity and the Balance Scorecard.
On the other hand, the financial performance of a business can be evaluated with the use of financial ratios and trend analysis. Financial ratios can be evaluated extensively using several types of financial ratios like liquidity, profitability, solvency, efficiency and investor ratios. Reasons for choosing Topic Evaluating the business and financial performance of a company’s affords us the opportunity to have an in depth analysis of figures stated in the financial statements. It allows us observe trends and make predictions about the future performance of the entity.
The choice of Morrisons for me is the uniqueness of its business strategy and steady growth patterns. With the acquisition of Safeway, Morrisons has been able to consolidate the gains of the synergy in a slow but progressive manner. This makes the company an interesting case study. Furthermore, in the current economic climate where businesses are failing and competition is fierce it is also important to see through its business trend whether Morrisons is prepared for future challenges. The supermarket chain industry is very dynamic in the UK and there is a continuous fierce battle for market share.
In the light of the fact that the United Kingdom is in a recession it would be interesting to see how prepared the company is financially and strategically to survive in these times. Project Objectives The project objectives are as follows; 1. To assess the business and financial performance of Morrison’s over the three year period to 3rd February 2008. 2. To review the year on year performance of Morrison’s with a view to assess the effectiveness of its strategies its readiness for the future. 3. To evaluate Morrison’s competitive position in the grocery/supermarket industry.
Research Questions The questions posed by this research are as follows; 1. How effective is Morrison’s business and financial strategy over the three year period under review? 2. How did Morrison fare in comparison to its competition? 3. Is the company positioned to meet future challenges/changes? 4. How do Morrison’s financial ratios compare to its competitors? 5. How does the company’s year on year performance measure over the 3 year period under review? Research Approach The approach to be adopted in carrying out this research project is as follows; 1.
Evaluate Morrisons business performance with the use of PESTEL, SWOT and Porter’s 5 Forces analyses models. 2. Review key performance indicators of the supermarkets industry and measure Morrisons success in achieving them. 3. Calculate financial ratios including solvency, liquidity, efficiency, Investor and profitability ratios for Morrison’s over the review period to determine trends and financial performance. 4. Review Morrison’s performance and position in comparison to its main competitors. 5. Assess the adequacy of its current strategy for long term business growth and sustainability.
PART 2 – Information Gathering and Accounting/ Business techniques. Information Sources Annual Reports and summary financial statements The main source of information for this study is the published financial statements of WM Morrisons Supermarket Plc and its main competitors for the three year period. The financial statements form the basis of the figures required to compute financial ratios and carry out trend analysis. Texts on Financial analysis and Business Analysis Books and texts on the types of ratios and the usefulness of various financial ratios were used in conducting this research.
They provide the definition as well as formulae for computing them. They also give insight into interpretation and limitations of ratios. Text on business analysis and review like key performance indicators, balance scorecard, Porter’s five forces were also used in this study. Media and Internet sources The news print and internet sources proved to be a veritable source of information. The ability to ‘google’ anything and everything on the topic was phenomenal. This provided the opportunity for extensive reading on Morrisons, Competitors activity, industry happenings, how to compute financial ratios amongst others.
Information was obtained from online news sites like the BBC, The Telegraph, Financial Times and The London Stock Exchange as well as market research specialists’ sites like TNS Worldpanel. Methods used in collecting information Information was collected mainly from secondary sources. Newspaper articles on Morrisons, Company profile from the London Stock Exchange, competitors and industry reports and industry position of respective retailers, company’s annual reports were obtained online. All the information gathered were obtained from different stakeholders to ensure that that a balance was achieved in terms of opinions and viewpoints.
The annual report and financial review were generated internally so we used that to assess the business and financial position of the company from the company’s point of view. As a FTSE 100 company it was important for the author to understand the company’s position from the point of view of the London Stock Exchange, the Media and market watchers. This was instructive in coming to a conclusion about the company’s business and financial performance as well as making predictions about its future outlook.
These sources give insight into Morrison’s market share, industry position, market capitalisation, company strength, customer satisfaction, ethical issues amongst others. On the other hand, financial reporting books were used to obtain information on types of ratios and their application. BPP texts in Corporate and financial reporting were useful in this regard. It was important to understand the meaning of ratios and their interpretations. A fall out of these ratios is to be able to establish trends which are ultimately useful o predict the future of the company. Limitations of information gathering The main limitation of information gathering is that 100% accuracy cannot be guaranteed. There is a small chance that some information gathered are inaccurate or that the source is unreliable. The chance of this occurring is however insignificant. By and large information obtained may be considered to be significantly accurate. Another limitation of information gathering can be information overload. With the advent of the internet so much information is available online.
This presents many authors with the challenge of sifting through the vast information available and extracting only the ones that are relevant and useful to the subject of the research project. Finally, information available are substantially historical in nature, hence some situations may have been overtaken by events. One of the financial measurements that will be evaluated in the course of this research project is the trend analysis. This measurement is useful in projecting the future outlook of a business, in some cases past trends are not a good indicator of future performance for various economic or business reasons.
Explanation of the accounting and/or business techniques This research project aims at evaluating the business and financial performance of WM Morrisons Supermarkets Plc over a three year period. The financial performance of Morrisons will be examined using ratio analysis, trend and common size analysis while the business performance of the company will be evaluated with the use of business review tools like PESTEL, SWOT, Porters 5 forces and Key Performance Indicators. Business Performance PESTEL Analysis
PESTEL is an acronym for Political, Economic, Sociological, Technological, Environmental and Legal framework. It is an examination of the macro environment of an organization with a view to identify the factors that might affect a number of vital variables that are likely to influence the organization’s supply and demand levels and its costs (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993). SWOT Analysis SWOT analysis is technique used to analyse the Strengths, weaknesses, opportunities and threats affecting an organisation.
The strengths and weaknesses are those variables that affect the company internally which the company has control over while opportunities and threats are those variables which are out of the control of the company. Porter’s Five Forces Analysis Porter’s five forces framework is an industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. It examines the competitive environment in which a company operates. The main advantage of this model is that it focuses on a single business unit, in this case Morrisons.
Five forces analysis focuses on five key areas namely; • Threat of new entrants • Bargaining power of suppliers • Bargaining power of customers • The threat of substitutes • Competitive Rivalry Key Performance Indicators Key performance indicators provide a series of measures against which management and investors can review the business and determine how it is likely to perform over the medium and long term. Limitations that may be associated with the use of key performance indicators include; • Lack of clarity and ambiguity in formulating performance indicators. • Setting of unattainable goals. Accuracy of results gathered and measurements • Performance indicators are an offshoot of a company’s strategy hence it may be difficult to compare firms with different strategies even though they operate within the same industry. Financial Performance Ratio Analysis Financial ratios are essentially tools for evaluating the financial statements of a firm with a view to establish whether or not the firm is meeting its business and financial objectives from stakeholders’ point of view. By relating two measures of performance in the financial statements we are able to gain insight into the results achieved.
Ratios are also used to assess the management’s performance and make predictions on the firm’s future outlook based on the trend. The following broad classifications of ratios will be used to evaluate the business and financial performance of Morrisons; Liquidity Ratios Liquidity ratios provide information about a firm’s ability to meet its short term financial obligations. These ratios are of particular interest to the company’s providers of finance. The ratios that are commonly evaluated under this category are the Current ratio, Quick ratio and the Cash ratio. The current ratio is measured as follows;
Current Asset Current Liability Providers of short term finance would prefer a high current ratio. Traditionally, a current ratio of at least 2:1 is considered a healthy indicator. However, this varies from industry to industry. The Quick ratio essentially eliminates the effect of inventory from the current ratio hence; Current Assets – Inventory Current Liability The Quick Assets ratio is famously referred to as the acid test. The cash ratio is the most prudent form of the liquidity ratios. It excludes all current assets except the most liquid, that is, cash and cash equivalents. Hence it is defined as;
Cash + Marketable Securities Current liabilities The cash ratio provides an indication of a company’s ability to pay off its current liabilities in the unlikely event that its credit facilities are called in. Profitability ratios Profitability ratios are useful in evaluating what returns a company is making on its capital investment. They also assist in assessing a firm’s success at generating profits. Ratios that may be evaluated under this category include, Gross Profit Margin, Net profit margin, Return on Capital Employed, Return on Shareholders’ funds, Return on Assets and Return on Equity.
Return on capital employed (ROCE) relates the profit generated to the capital employed, thereby measuring efficiency. Capital employed is essentially the net assets of a company; it may also be expressed as Shareholders funds plus long term borrowings. ROCE is computed as; Profit before Interest and taxes (Operating Profit) Capital Employed ROCE is made up of two ratios which are referred to as secondary ratios of profitability. These ratios are the Net Profit Margin and the Asset Utilisation ratio. These have a direct relationship to the results generated from the ROCE.
The Net profit margin measures how well a company has controlled overheads. It is calculated as follows; Net ProfitX100 Sales Assets utilisation or Asset turnover ratio is a measure of the amount of sales revenue generated by every ? 1 invested in the assets of the company. This is expressed as; Sales Net Assets The gross profit margin is a measure of the profit margin a company earns on sales. This is measured as; Sales – Cost of goods sold Sales Efficiency ratios Efficiency ratios are an indication of how well a company utilises it assets.
They are also referred to as asset utilisation or working capital ratios. The following ratios can be evaluated under this category. These include Receivables turnover and Receivables collection period, used to assess how quickly a company’s debts are paid. It also evaluates how many times inventory is turned over. They are calculated as follows; Receivables Turnover=Credit Sales Trade Receivables Receivables collection period =Trade ReceivablesX 365 Credit Sales On the inventory side of things two ratios can be calculated as follows; Inventory turnover and Inventory holding period.
These ratios measure the efficiency of inventory management policies of the company. The inventory figure used is always the average of the opening and closing inventory. They are calculated as follows; Inventory Turnover=Cost of sales Inventory Inventory Holding period =InventoryX 365 Cost of Sales Another pair of efficiency ratios is the Payables turnover ratio and the payables payment period. They are indicators of the nature of credit taken from suppliers. Payables Turnover=Purchases Trade payables Payables payment period =Trade payablesX 365 Purchases Gearing ratios
Financial gearing expresses the relationship between debt and equity in the financial structure of a company. Gearing ratios provide an indication of the long term solvency of a company. Under this category the following ratios are relevant; The Debt ratio establishes the relationship between debt and the total assets of a company. It is expressed as TotalDebt Total Assets The debt-equity ratio is similar to the debt ratio except for the denominator which is total equity. This ratio basically compares the company’s debt with shareholders funds (total equity). This is calculated as follows; Total debt Total Equity
The Interest cover ratio is another gearing ratio which measures the security of interest payable. It is an indicator of how well the firm’s earnings can cover interest payments on its debts. This is calculated as follows; Profit before interest and tax Interest payable Investor ratios Investor ratios are of particular interest to current and prospective investors who from time to time would want to appraise an investment in a particular company. The ratios that can be evaluated under this category are Earnings per share (EPS), Price/Earnings ratio (PE ratio), and Dividend cover and dividend yield ratios.
Earnings per share measures the earnings attributable to a shareholder for every unit of share held in a company. This is calculated as follows; Profit available to shareholders Number of shares ranked for dividend The Price earnings ratio is an indicator of investor confidence in the company and its future outlook. This is expressed as; Share Price Earnings per share Dividend policy ratios provide insight into the dividend policy of a company as well as its growth prospects. Dividend cover is a demonstration of how much a company can actually pay out if it decides to expend all its distributable profits as dividends.
Earnings per share Dividend per share Dividend yield ratio is the percentage of the dividend to the market price to indicate the return on the amount invested in acquiring shares. This is expressed as Dividend per share Share Price Limitations of ratio analysis Financial ratios come with some inherent limitations which include; • Ratios in themselves are meaningless as they are only pointers to where a company should be. • Some ratios lack standard definitions which could hinder comparability. • Data used are historical and maybe out of date, so more recent information might limit its relevance. Financial statements are subject to manipulation by management and therefore reduce the reliability of ratio analysis. • Risks are never the same, even within the same industry, therefore the ratio comparison with other companies may be less consistent. Trend and Common Size Analysis Trend analysis refers to the concept of collecting information and attempting to spot a pattern or trend therein. In this case it will involve the comparative analysis of Morrisons financial statements and ratios over time. It is a useful tool in predicting future events.
Common size analysis on the other hand, indicates the proportion of an asset/liability/expense is as a function of total assets/liabilities/revenue. It expresses income statement and balance sheet items as percentages which are compared with the underlying assets/liabilities or revenue. The limitation of trend and common size analysis is that historical data is used in the analysis hence they could prove to be out of date. PART 3 – Results, analysis, conclusions and recommendations. Situation Analysis Morrisons activities are principally based in the United Kingdom with its headquarters in Bradford, West Yorkshire.
Morrisons was for many years focused in the north of England. With the takeover of Safeway in 2004, the company expanded southwards, and now has a total of 382 superstores across the UK. Morriosns recently repositioned itself to be ‘Food specialist for everyone’. We shall carry out a situation analysis of Morrisons using the PESTEL model to get a better understanding of its business performance. Political The United Kingdom enjoys a stable political environment. The government regulates the activities of the grocery/retail industry mainly through agencies like the Competition Commission.
This is to ensure companies within the same industry do not collude to fix prices of goods and services. The Competition Commission found in April 2008 that UK supermarkets consistently misuse their buying power against suppliers. The Commission recommended the introduction of a watchdog to stop the problem. The Commission will also shortly publish a draft Order outlining measures to prevent exclusivity arrangements and restrictive covenants being used by grocery retailers to restrict entry by competitors in order to improve competition in local areas.
All companies operating in the UK are obligated to implement the Minimum wage of ? 5. 73 per hour for all adults working legally in the UK. Economic Economic factors have significant impact on the business of Morrisons. This includes fluctuation in the stock market, increase in tax, increase in minimum wage can seriously affect the bottom line of a company like Morrisons. Disposable income is influenced by government policies regarding issues like taxation and interest rates affect consumer spending.
Morrisons is however fortunate to be mainly a grocery/retail goods store which are necessities and hence even in the face of lower disposable income, buying patterns may not be significantly affected. The TNS Worldpanel grocery market share figures show that the Grocery sector continues to power ahead despite the economic downturn, this growth can be accounted for by the well-documented food price inflation, particularly in dairy products, fresh produce and bread but it is nevertheless evidence that, despite pressure on the household budget, we still have to eat. Sociological
Social trends like the green revolution, healthy eating, and seasonal habits can have significant impact on the bottom line of organisations like Morrisons. The culture in the UK is such that grocery shopping in done regularly every week or couple of days. Technological Technology has a significant impact on every business in the current dispensation. These days’ people want things to be done quickly, fast and with little intervention. Hence the ‘microwave’ culture where people buy things online from the comfort of their homes. Online shopping is an area where Morrisons will have to establish itself to increase market share.
Environmental We are in the green age where every activity is measured by how much it impacts the environment. There is consequently a huge responsibility on all organisations to reduce carbon footprint, to be ‘greener’ and to adopt eco-friendly solutions to business. Legal Morrisons is obliged by law to conduct its business within the scope of the laws of the land. It is important that labour and employment laws of the UK are not compromised in handling staff affairs. It is also important that health and safety laws are complied with. SWOT Analysis A SWOT analysis of Morrisons is as follows;
Strengths • As a food specialist, Morrisons differentiates itself from its larger competitors who are seeking to expand their non-food credentials. Morrisons emphasises its deep understanding of food by being closer to its source than other retailers. It employs more specialist butchers, fishmongers and bakers than the other chains in the ‘big four’. • Highly vertically integrated company structure which is unique amongst the ‘big four’ supermarket chains in the UK. • Solid assets base, FTSE 100 Index Company with high credit rating. Weaknesses • Morrisons lacks nationwide presence across the UK.
Data gathered from Tesco and Sainsbury’s annual reports show that Morrisons is very far behind in terms of nationwide coverage, [pic] • Morrisons strategy of operating from only large stores and limiting its products range to mainly food products is a major weakness for the company and hindrance to growth. Opportunities • The internet poses a major opportunity for Morrisons. It could take advantage of the online grocery service platform where its main rivals, Tesco, ASDA and Sainsbury’s already have a strong foothold. • Opening of convenience stores like the ‘Tesco local’ and ‘Sainsbury’s local’ format.
This will facilitate a wider reach and greater appeal for the brand. • Expand product and services range to include electronics. Clothing, financial services, and insurance, online comparison sites amongst others. • In terms of number of stores, Morrisons is still so far from its main competitors, Tesco, Sainsbury’s and ASDA. There is an opportunity for Morrison to have a nationwide appeal by opening more stores across the UK. • Morrisons could take its business internationally. There are opportunities for the brand to be spread across Europe and beyond. Threats Stiff competition from not just its main competitors like Tesco’s and Sainsbury’s but also from smaller competitors like ALDI and LIDL who are aggressively competing for market share with the big brands. Porter’s Five Forces Analysis Threat of new entrants The threat of new entrants into the retail/grocery chain industry is low. This is because of significant barriers to entry. The entry barriers include high and even prohibitive capital outlay required to be a significant player in the industry. There is also existing loyalty to the major brands so new entrants will have difficulty in getting customers to switch over.
The major players in the supermarket chain industry also offer various price reduction and frequent shopper loyalty schemes which would make it more difficult to get customers to switch to other brands. [pic] Bargaining power of suppliers The bargaining power of suppliers in this industry is weak. It is popular knowledge that the ‘big four’ have strong hold over its suppliers to the extent that they have a significant influence on product prices. Due to the high volumes which the big players are able to turnover in short periods, major suppliers want to befriend them and this friendship is usually to the benefit of the supermarket chains.
Morrisons strategy in terms of supplier relationship is unique. It operates a highly vertically integrated company structure whereby it owns and controls its supply chain and manufacturing sites. Morrisons also owns and manages its own distribution network. By owning and managing a very modern fleet, it is able to manage the freshness and quality of its produce. Morrisons prides itself with owning and managing the companies that produce its plants and flowers, fruit and vegetables, pizzas, pies, cooked meats and sausages, as well as packing cheese and bacon, beef, pork and lamb and poultry and bread.
Bargaining power of customers The bargaining power of customers in this industry is strong. Although customers have little or no influence over the price of goods and services, there are several other supermarkets and convenience stores where the same or similar products can be obtained. There are virtually no switching costs when customers change supermarket. So many factors influence the buyers’ choice of where to buy groceries. These include proximity to home or work, special offers, loyalty scheme, personal preference and price sensitivity.
Morrisons strategy is based on doing the basics efficiently, selling predominantly food at lower prices, and doing so only from large stores. Threat of substitutes The threat of substitutes is high as switching costs are low. Morrison operates in an industry where market share can be quickly and easily eroded. Customers can decide to change supermarket or buying patterns without any notice. Customers can decide to buy groceries from markets, directly from farms, convenience stores or corner shops. Most products in the aforementioned store formats have major similarities and can be used interchangeably.
Morrisons appeal comes mainly from its Market Street format. The meat is near or next to the butcher’s counter, the delicatessen being traditionally named Provisions with cheese fridge nearby and a rotisserie counter named Oven Fresh. There is a Pie Shop in most stores and a bell rings when a fresh batch comes out of the oven. The overall theme is based on an early 20th century street setting in the north of England running around the edge of the store, with more conventional aisles in the centre. Competitive Rivalry within the industry Competitive rivalry is intense within the industry.
Below is the latest TNS Worldpanel grocery market share figures published 3rd March, 2009. Although there is a significant gap between Morrisons (the fourth largest UK grocery chain) and the brands below it, it is important to observe the progress being made by the likes of ALDI, LIDL and Iceland in increasing market share. Consumers are increasingly turning to budget supermarkets such as Aldi and Lidl for their weekly grocery shop in a bid to offset higher food prices. This is due to the fact that shoppers are continuously seeking lower prices.
From the charts below we see Tesco’s command over the market with revenue doubling its closest rivals ASDA and Sainsburys. Revenue [pic] Market Share [pic] Great Britain Consumer Spend Amongst the Top 4, Morrisons continues to outperform the market with 9% growth increasing its share to 11. 4% from 11. 1% a year ago and Asda inches ahead with 7% growth adding 0. 1 share points according to the TNS Worldpanel grocery market share report (see appendix). [pic] Source: TNS Worldpanel Analysis of Key Performance indicators KPIs |2007/08 |2006/07 |2005/06 | |Food retailer ranking |4th |4th |4th | |No. Of stores |375 |368 |378 | |Customers per week |10 million |9 million |9 million | |Staff strength |117,000 |114,000 |123,000 | |Grocery Market share |12. % |11. 9% |11. 1% | |Selling space |11m sq ft |10. 5m sq ft |10m sq ft | |Turnover |13b |12. 5b |12. 1b | |Like for like sales |Up 4. 6% |Up 5. 2% |Up 2. 4% | |Dividend Cover |3. 0 times |2. 1 times |0. 5 times | |Net debt |0. 4b |0. 8b |1. 15b | It is interesting to note that over the past ten years (see appendix) the Top four contenders in the UK grocery and supermarket chain has remained unchanged. Morrisons has retained its fourth position over this time. The number of stores has remained flat because of the company’s strategy of opening only large stores with the market street format. It is however commendable that in 2008 Morrisons was able to add one million new customers per week visiting its stores.
Critical Analysis of Results The company fully absorbed the Safeway business during the 2006/07 financial year. There has been strong growth in sales, profit and cash generation. The 2006/07 financial year was the first year Morrisons was operating as a truly national retailer. The fishmonger business was a star performer due to healthy eating and represents a point of difference for Morrisons. Below is a summary of the financial performance of Morrisons over the three year period under review. Ratio Analysis | |Morrisons | |2006 |2007 |2008 | |Profitability Ratios | | | | |Gross Profit Margin |1. 13% |5. 10% |6. 31% | |Operating Profit Margin |-2. 17% |3. 39% |4. 72% | |PBIT Margin |-1. 98% |3. 62% |5. 18% | |Net Profit Margin |-2. 07% |1. 99% |4. 7% | |ROCE |-4. 25% |8. 18% |11. 62% | |ROE (Return on equity) |-6. 86% |6. 32% |12. 65% | | | | | | |Operating Efficiency | | | | |Net Assets Turnover |2. 22 |2. 16 |2. 08 | |Total Assets Turnover |1. 63 |1. 69 |1. 0 | |Non-Current Assets Turnover |1. 83 |1. 89 |1. 93 | |Equity Turnover |3. 32 |3. 17 |2. 96 | | | | | | |Liquidity Ratios | | | | |Current Ratio |0. 45 |0. 41 |0. 49 | |Quick Ratio |0. 23 |0. 21 |0. 5 | |Interest Cover |3. 27 |5. 50 |11. 20 | | | | | | |Long-term Solvency | | | | |Gearing |35. 28% |28. 81% |24. 30% | |Equity to Assets |64. 72% |71. 19% |75. 70% | |Debt Ratio |50. 99% |46. 2% |42. 67% | |Financial Leverage |2. 04 |1. 88 |1. 74 | | | | | | |Working Capital (Efficiency Ratios) | | | | |Receivables Days |4. 74 |4. 42 |5. 60 | |Payables Days |44. 83 |46. 33 |50. 43 | |Inventory Turnover Days |12. 7 |11. 36 |13. 28 | |Cash Conversion Cycle |61. 75 |62. 11 |69. 31 | | | | | | |Investor Ratios | | | | |Earnings Per share |1. 7 |8. 3 |14. 4 | |P/E Ratio |111 |36 |21 | |Dividend yield |0. 2 |0. 01 |0. 02 | |Dividend Cover |0. 5 |2. 1 |3 | PROFITABILITY RATIOS Return on Capital Employed (ROCE) ROCE was negative in 2006 because the company made a net loss of (? 312m) due mainly to one-off Safeway’s conversion and integration costs incurred during the year. However, between 2007 and 2008, ROCE increased from 8. 18% to 11. 62%, this could be as a result of increase in the Gross and operating profit margin during the period. Operating profit margin
Operating profit margin was negative in 2006 due to the absorption of the one off payment of Safeway integration cost conversion, this however turned around in 2007 to 3. 39% and then 4. 72% in 2008. This could be as result of increase in the gross profit margin as well as significant reduction in administrative expenses 2007 and 2008. LIQUIDITY RATIOS Current Ratio Current ratio decreased from 0. 45 in 2006 to 0. 41 in 2007, then increased to 0. 49 in 2008. This is in line with the grocery and supermarket industry average, Tesco current ratio was 0. :1 while Sainsbury was 0. 7:1. This is mainly because there is little current asset compared to current liabilities. Inventory and receivable days are very short, and surplus cash is quickly re-invested in acquiring stock or carrying out expansion plans. Sales are mainly on a cash and carry basis. Quick ratio Quick ratio was 0. 23:1 in 2006, 0. 21:1 in 2007 and 0. 25:1 in 2008. This is due to the fact that almost 50% of current assets are inventory. This shows that the goods sold are extensively financed by suppliers (creditors). EFFICIENCY RATIOS
Inventory Turnover Period Inventory turnover period was relatively stable over the period under review, this shows efficient working capital management especially in terms of lead times. Tesco’s average is 18days while Sainsbury is 13days. Receivable collection period Supermarkets scarcely sell goods on credit; hence the company has little receivables. Morrisons receivable collection period between 2006 and 2008 was an average of 5days. When compared with their competitors, Tesco has an average 9days while Sainsburys averaged 4days.
Tesco’s higher receivables day may be due to the high range of non-grocery products like electronics and financial services amongst others which they extend credit facilities. Account payable payment period Morrisons payable days in 2006 was 45days, 46days in 2007 and 50days in 2008. The changes were not significant however; it reveals that the company is largely financed by its suppliers. DEBT/EQUITYRATIOS Debt ratio Morrisons debt ratio shows a reduction from 51% in 2006 to 43% in 2008, this is mainly due to the significant reduction in net debt from ? 1. 15billion in 2006 to ? 543 million in 2008.
Gearing ratio Morrisons gearing in 2006 was 35% while in 2008 it was 24. 30%. This improvement is an indication that share holders equity is increasing while debt is significantly reduced. Interest cover After the disappointing results in 2006, the company was able to achieve an interest cover of 5. 5 times in 2007 and 11. 2 times in 2008. This is quite commendable as it guarantees a good rating for the company before its financiers. INVESTOR RATIOS Earnings per share The diluted EPS of Morrisons in 2006 was (9. 46) pence, this was due to the loss made in the year, however the EPS in 2007 was 9. 1 and increase to 20. 67 in 2008. This shows a considerable improvement as investors’ equity is increasing, thereby increasing the shareholders wealth. Dividend Cover Morrisons made a loss in 2006 this had a negative effect on dividend cover, but in 2007 it achieved 2. 1 times and 3 times in 2008. This is evidence of an appropriate profit retention policy. Dividend Yield The dividend yield in 2006 was 2%, 1. 3% in 2007 and 1. 6% in 2008. The reduction could be as a result of high profit retention for the purpose of continuous growth. Price Earnings (P/E) ratio
Morrisons P/E ratio was 36 in 2007 but fell to 21 in 2008. Its competitors ratios were; Tesco: 18. 89 while Sainsbury: 22. 15 in 2007. This could be as a result of a drop in the company’s share price which is an effect of the economic downturn which has affected the stock market. Common Size and Trend Analysis The common size and trend analysis performed on Morrisons Income statement and Balance sheet were instructive in revealing how the company fared over the period under review. The gross profit as a percentage of revenue increased from 1. 1% in 2006 to 5. % in 2007 and 6. 3% in 2008. This resulted also in an increase in operating profit as a percentage of revenue from 3. 4% in 2007 to 4. 7% in 2008. This is reflection of Management’s efficient control of costs. It was observed that administrative expenses reduced from 3. 4% in 2006 to 2. 2% in 2007 and 2. 1% in 2008. Tangible Assets as a percentage of Total assets remained flat at an average of 86% over the period. The same goes for inventory with an average percentage of 5. 5%. However, there was a decline in the cash and cash equivalent percentage from 3. 5% in 2006 to 3. % in 2007 and 2. 6% in 2008. This is likely to be as a result of the impact of the share buyback programme to return ? 1 billion surplus capital to shareholders during 2008 and 2009. It is worthy of note that long term borrowings as a percentage of total equities and liabilities reduced from 13. 7% in 2006 to 10. 1% in 2008. In the same vein, other financial liabilities reduced from 4% in 2006 to 1% in 2008. Trend analysis gives one the opportunity to see the changes in percentage of the items in the income and balance sheet statement, when compared with the base year.
Morrisons was able to demonstrate strong growth over the period. This is seen in the growth achieved in like for like items which was 2. 4% in 2006 to 5. 2% in 2007 and down to 4. 6% in 2008. Also impressive was growth in dividend cover and dividend per share from 0. 5 and 3. 7pence per share to 3times and 4 pence per share respectively in 2008. Conclusion Morrisons strategy is to position the business as the UK food specialist for everyone appears to be yielding favourable results. Morrisons has been able to differentiate itself from its other main competitors as a food specialist.
The success achieved in the implementation of this strategy is largely associated with the fact that Morrisons operates a highly vertically integrated company structure whereby it owns and controls substantially its supply chain, manufacturing sites and distribution network. An evaluation of the business and financial performance of Morrisons from the 2005/06 to 2007/08 financial years provided insight into how they performed and possibly what the future holds. The 2005/06 financial year was very challenging for the company largely due to the absorption of the Safeway conversion and integration costs.
Worthy of mention is the fact that the programme of store conversions from Safeway to Morrisons was the largest of its kind in British retail history. In the 2006/07 financial year the company bounced back from the set back of the previous year and further consolidated its position as the fourth largest grocer in the UK. Never before has competition in the grocery and food retail industry been so fierce. All players have to literally be on their toes to ensure market share does not slip away. All kinds of offers and promotions are embarked upon to win customers.
One area of panic for companies like Morrisons has not just been its main competitors but the smaller competitors like Iceland, Aldi and Lidl who are slowly clawing market share. Despite the economic downturn, food and grocery retail performance index appear unfazed. Considering the intensity of competition, Morrisons has performed well by increasing the number of customers per week in stores by one million 10 2008 to 10 million weekly. This has led to an increase in revenue between 2006 and 2008 of 7%. Operating profit increased by over 400% from ? 112 million in 2006 to ? 612 million in 2008.
From a negative Earnings per share (EPS) in 2006 Morrisons was able to reverse this to achieve EPS of 14. 4 pence in 2008. Full year dividend in 2008 rose to 4. 8 pence with a dividend cover of 3 times. The number of stores and market share increased marginally to reflect the company’s performance. There is however some opportunities in the industry which Morrisons has not taken advantage of. There is a huge online market where the company is yet to become a player. Its main competitors are doing exceptionally well in this market. Another area which is yet to be fully harnessed is the coverage.
Morrisons coverage especially in the South East of England is not adequate to effectively compete with the likes of Tesco, Sainsbury’s and ASDA as well as its smaller counterparts like Iceland and Lidl. It may need to consider the convenience store format to reach out to areas where its presence is not felt. BIBLIOGRAPHY Kaplan,S and Norton, D. (1996) The Balanced scorecard-Translating strategy into action . Harvard Business School Press Boston, 1996 BPP Learning Media (2007a) ACCA Paper F7 Study Text: Financial Reporting (International). London: BPP Learning Media.
BPP Learning Media (2007b) ACCA Paper F9 Study Text: Financial Management (International). London: BPP Learning Media. BPP Learning Media (2008a) ACCA Paper P3 Study Text: Business Analysis. 2nd ed. London: BPP Learning Media. BPP Learning Media (2008b) Success in Your Research and Analysis Project. 7th ed. London: BPP Learning Media. Porter, M. E. (2008) The Competitive Forces that Shape Strategy. Harvard Business Review, 1, pp. 78 – 93. [Online] Retrieved on 21st March 2009 from: Business Source Premiere. http://web. ebscohost. com Morrisons Plc (30th Jan 2006,4th Feb. 007, 3rd Feb. 2008) Annual Report and Accounts Sainsbury plc (2007), Annual Reports and Accounts. Tesco Plc (2007), Annual Reports and Accounts http://www. netmba. com/finance/financial/ratios/ retrieved on 10th march 2009. http://www. financialmodelingguide. com/financial-ratios/financial-ratios/ retrieved on11th March 2009. http://www. ameritradefinancial. com/educationv2/fhtml/learning/profratios. fhtml#profit retrieved on 12th March 2009 http://management. about. com/cs/generalmanagement/a/keyperfindic_2. htm retrieved on 18th March 2009 http://www. oup. om/uk/orc/bin/9780199296378/01student/additional/page_12. htm retrieved on 22nd March 2009-03-22 http://www. investopedia. com/university/ratios/commonsize. asp http://www. oup. com/uk/orc/bin/9780199296378/01student/additional/page_12. htm ^ “Trend analysis Definition” (2005), WebFinance, Inc. , web: Investor-TA: http://www. investopedia. com/features/industryhandbook/porter. asp http://www. competition-commission. org. uk/inquiries/ref2006/grocery/groceries_inquiry_news. htm http://www. groceryweb. co. uk/ http://www. tnsglobal. com/news/news APPENDICES[pic][pic] Source: TNS Worldpanel
TNS Worldpanel grocery market share report | |12 Weeks to 22 April 2007 |12 Weeks to 20 April 2008 |% chg | | |? 000s |% ** |? 000s |% ** | | |Total Till Roll |27,088,453 | |28,142,424 | |3. 9 | |Total Grocers |19,156,606 |100. 0% |20,347,820 |100. 0% |6. | |Total Multiples |17,746,712 |92. 6% |18,891,569 |92. 8% |6. 5 | |Tesco |6,006,498 |31. 4% |6,336,877 |31. 1% |5. 5 | |Asda |3,223,728 |16. 8% |3,444,410 |16. 9% |6. 8 | |Sainsbury’s |3,223,728 |16. 4% |3,265,244 |16. 0% |4. 2 | |Morrisons 2,122,844 |11. 1% |2,317,304 |11. 4% |9. 2 | |Somerfield |717,970 |3. 7% |745,974 |3. 7% |3. 9 | |Kwik Save |31,190 |0. 2% |- |0. 0% |-100. 0 | |Waitrose |746,660 |3. 9% |799,181 |3. 9% |7. 0 | |Iceland |310,434 |1. % |348,345 |1. 7% |12. 2 | |Netto |123,201 |0. 6% |130,546 |0. 6% |6. 0 | |Lidl |426,065 |2. 2% |458,590 |2. 3% |7. 6 | |Aldi |474,666 |2. 5% |557,290 |2. 7% |17. 4 | |Farm Foods |91,108 |0. 5% |103,467 |0. % |13. 6 | |Other Freezer Centres |43,658 |0. 2% |48,727 |0. 2% |11. 6 | |Other Multiples |293,582 |1. 5% |335,615 |1. 6% |14. 3 | |Total Coops |872,471 |4. 6% |893,436 |4. 4% |2. 4 | |Total Independents |537,423 |2. 8% |562,815 |2. % |4. 7 | |Total Symbols |192,417 |1. 0% |204,412 |1. 0% |6. 2 | |Other Independents |345,006 |1. 8% |358,403 |1. 8% |3. 9 | | | | | | | | |** = Percentage Share of Total Grocers | Source: TNS Worldpanel Financial Ratios for J Sainsbury Plc |Sainsbury’s | | |2005 |2006 |2007 | |Profitability Ratios | | | | |Gross Profit Margin |6. 64% |6. 83% |5. 62% | |Operating Profit Margin |1. 43% |3. 03% |2. 97% | |PBIT Margin |1. 61% |3. 41% |3. 3% | |Net Profit Margin |0. 36% |1. 89% |1. 84% | |ROCE |3. 26% |8. 52% |8. 14% | |ROE |1. 49% |7. 45% |6. 67% | | | | | | |Operating Efficiency | | | | |Net Assets Turnover |1. 85 |2. 43 |2. 7 | |Total Assets Turnover |1. 26 |1. 79 |1. 76 | |Non-Current Assets Turnover |1. 80 |2. 25 |2. 13 | |Equity Turnover |4. 13 |3. 94 |3. 61 | | | | | | |Liquidity Ratios | | | | |Current Ratio |0. 79 |0. 1 |0. 66 | |Quick Ratio |0. 67 |0. 50 |0. 40 | |Interest Cover |1. 67 |5. 46 |4. 63 | | | | | | |Long-term Solvency | | | | |Gearing |51. 04% |36. 56% |34. 29% | |Equity to Assets |48. 6% |63. 44% |65. 71% | |Debt Ratio |69. 51% |54. 58% |51. 21% | |Financial Leverage |3. 28 |2. 20 |2. 05 | | | | | | |Working Capital (Efficiency Ratios) | | | | |Receivables Days |6 |4 |4 | |Payables Days |50. 7 |51. 78 |49. 43 | |Inventory Turnover Days |14. 02 |13. 48 |14. 76 | |Cash Conversion Cycle |71. 27 |69. 45 |68. 41 | | |WM Morrison Supermarkets Plc | | |? m |? m |? | | |2006 |2007 |2008 | |Income Statement | | | | | | | | | |Revenue |12,115 |12,462 |12,969 | |Cost of Sales |(11,978) |(11,826) |(12,151) | |Gross Profit |137 |636 |818 | | | | | | |Profits arising on property tranx |(9) |38 |32 | |Administrative Expenses |(409) |(272) |(268) | |Other Operating Income/Expenses |19 |21 |30 | |Operating Profit/(Loss) |(263) |423 |612 | | | | | | |share of post tax profit from BP joint venture |2 |0 |0 |Interest Receivable |21 |28 |60 | |Profit/(Loss) Before Interest & Tax |(240) |451 |672 | |Finance Cost |(73) |(82) |(60) | |Profit/(Loss) Before Tax |(313) |369 |612 | |Income Tax Expense |63 |(121) |(58) | |Profit/(Loss) After Tax |(250) |248 |554 | | | | | | |Balance Sheet | | | | | | | | | |Assets | | | | |Non-Current Assets | | | | |Tangible Assets |6,362 |6,345 |6,444 | |Investment property |225 |241 |239 | |Financial assets |36 |19 |43 | | |6,623 |6,605 |6,726 | | | | | | |Current Assets | | | | |Inventories |399 |368 |442 | |Trade & Other Receivables |157 |151 |199 | |Other Financial Assets |0 |0 |74 | |Cash & Cash Equivalents 264 |247 |195 | | |821 |766 |910 | | | | | | |Total Assets |7,444 |7,371 |7,636 | |Equities & Liabilities | | | | |Equities | | | | |Share Capital |267 |268 |269 | |Share Premium |37 |41 |57 | |Merger Reserve |2,578 |2,578 |2,578 | |Retained Earnings & other reserves |766 |1,040 |1,474 | |Total Equities |3,649 |3,927 |4,378 | | | | | | |Non-Current Liabilities | | | | |Other financial liabilities |1,023 |768 |774 | |Deferred tax |423 |478 |424 | |Net pension liabilities |416 |198 |68 | |Provisions for Liabilities |127 |145 |139 | |Minority Interest | | | | | |1,989 |1,589 |1,405 | | | | | | |Current Liabilities | | | | |Trade
Payables |1,471 |1,501 |1,679 | |Other financial liabilities |297 |254 |77 | |Current tax liabilities |39 |100 |97 | | |1,807 |1,855 |1,853 | | | | | | |Total Equities & Liabilities |7,444 |7,371 |7,636 | Source: WM Morrisons Annual Report Common Size Analysis |Morrisons | | |% |% |% | | |2006 |2007 |2008 | |Income Statement | | | | | | | | | |Revenue |100. 0% |100. 0% |100. 0% | |Cost of Sales |98. 9% |94. 9% |93. 7% | |Gross Profit |1. 1% |5. 1% |6. % | | | | | | |Profit ariding on property transactions |-0. 1% |0. 3% |0. 2% | |Administrative Expenses |-3. 4% |-2. 2% |-2. 1% | |Other Operating Income/Expenses |0. 2% |0. 2% |0. 2% | |Operating Profit/(Loss) |-2. 2% |3. 4% |4. 7% | | | | | | |Share of post tax profit from BP joint venture |0. 0% |0. 0% |0. % | |Interest Receivable |0. 2% |0. 2% |0. 5% | |Profit/(Loss) Before Interest & Tax |-2. 0% |3. 6% |5. 2% | |Finance Cost |-0. 6% |-0. 7% |-0. 5% | |Profit/(Loss) Before Tax |-2. 6% |
