Morrisons Chief Executive Dalton Philips talks about his plans to make Morrisons fit for the future

15-7-2013 — /europawire.eu/ — Dalton Philips talks about his plans to make Morrisons fit for the future at Centre Point, London on Thursday 11th July 2013. To read his speech in full, please see below.

Thanks for coming for what I hope, is going to be the start of more regular opportunities for us to meet.

I realise, not least because Richard and Julian keep telling me, that you don’t get to see me as often as you do some of my counterparts.

This is, of course, largely because of where we are based.

There are plenty of advantages of being in Bradford but distance from London is one of the disadvantages.

But I don’t want geography to prevent us talking about what is happening in our business or this fast-moving industry as a whole.

And today seems a good time to start because there is a great deal to talk about.
We’ve had some big announcements in recent weeks – and we are about to see, for example, a rapid expansion of our convenience stores.

Before I answer your questions about these developments and anything else you want to raise, I want to talk about how they fit together to drive our wider strategy for the business.

In particular, I want to go into a little more detail about how, I believe, we have put the right building blocks in place to make Morrisons fit for the future.
It’s a sort of mini-presentation – including a short film – which means today will, at least at the start, be a little more formal than these meetings will usually be.
It’s something I have been discussing with the managers of our 500 stores and with shareholders over the last few weeks – and with colleagues at our Camden store earlier this morning.

FIT FOR THE FUTURE
Let me start by explaining what I mean by fit for the future? I mean that by 2015 – when all the work now underway is finished – we will be a true national multi-channel and multi-format player.

It means we can compete on a level playing field – for the first time – and succeed by building on the enormous strengths of our business.

And this is a business with huge, sometimes over-looked, strengths.
Our focus on affordability and quality is exactly right for
these hard times.

So is our emphasis on the freshness and provenance of
the food we sell.

Value and trust have never been more important to consumers.
The decision to concentrate on food rather than be diverted into non-food areas such as consumer electronics was, most people now agree, right.

We are not saddled with a large network of hypermarkets – white elephants which are expensive to run and don’t meet the needs of today’s customers.
Hypermarkets, as I’ve said before, are going to be a blip in retail history.
And, of course, Morrisons is a very profitable business.

We have a strong balance sheet – something which gives us great flexibility and freedom.

We have, in fact, the strongest credit rating of any retailer in Europe.
This is a business with real strengths and real opportunities ahead of us.
But there were also areas where changes – big changes – were needed when I joined three years ago.

NEW CHANNELS

Some of these changes stem from the structural and permanent shift in consumer behaviour now underway.

Growth in core supermarkets – the area where Morrisons operate – was negative on a like for like basis across the industry last year.

In comparison, the industry’s on-line and convenience channels – where other retailers have a strong presence – saw double-digit growth.

When less than a third of the growth in the market came in these two channels, as was the case in 2010, Morrisons could compete because of the strength of our customer offer.

But when the figure reaches over 50 per cent as it now has, defying gravity becomes a lot harder.

In a retail business, indeed any business, you need to be where the growth is. And it was clear we were not.

Which is why I said two years ago that I wanted us to be involved in convenience and on-line and I wanted us to do it well.

SYSTEMS
But doing it well also required us to tackle another less obvious problem.
There is a widespread view that retailers are in the advance guard of the adoption of technology.

Technology which provides fast and accurate information about what’s happening in stores and the needs of customers.

For a variety of reasons – many of which can be traced back to the acquisition of Safeway – this was certainly not the case with us.

While we’ve plenty of smart people, there was a real absence of smart systems.
We’ve been running a 21st Century business on systems and infrastructure firmly stuck in the 20th Century.

Cash takings were counted every night in every store by hand – quite an undertaking for an £18 billion business.

Tracking goods from our manufacturing plants to the tills involved a great deal of manual input and paperwork.

Restocking of our main lines was done by staff walking down every aisle, looking at the shelves and writing down what we need on forms like this which have not really changed for decades.

Even in 2013, our store managers have no real-time way of knowing what products are on their shelves, in the stockrooms or where replacements are in the distribution chain.

This lack of basic information has many knock-on effects.

It means, for example, that we have to keep more products in our stores and distribution centres just in case they are needed, adding to our costs.
Our antiquated systems even limit the promotions we can run.

They don’t easily allow us to offer promotions involving a mix of different products or a buy three and get one free deal.

In fact, our lack of smart systems was a major barrier to us being involved in convenience and on-line.

They are only just becoming able to let us vary the product mix we offer in our convenience stores to reflect different communities.

Nor would they allow us to expand our convenience stores at the rate we now are.

We only had capacity on our systems for 500 stores until we found a way round it in the last couple of months.

It was, in effect, our own Millennium Bug.

Putting all this right has not been easy and it is not cheap.

It will have cost us just over £300 million by the end of this year – all within our planned capital expenditure programme.

But it is essential if we are going to build on the strengths of this business.
There are two approaches. You can take time to design a replacement, test it and roll it out.

Or you can try and do it all in one go.

The Big Bang approach is always tempting for businesses
and new CEOS.

But retail history is littered with stories of how the Big Bang has gone badly wrong.

We know all about this at Morrisons from our own experience with Safeways.
So we decided to put in the effort to get it right first time. We call it radical evolution.

It’s a long process and it’s not over yet. But we are starting to see the fruits of all this planning and hard work.

We’ve finally moved to electronic counting of money.

Instead of paper re-ordering forms, electronic pads like this are being introduced across our stores, saving time and reducing mistakes.

These are, however, just symbols of fundamental changes underway.
Behind the scenes a comprehensive overhaul and modernisation of our systems is taking place to meet the demands of the business not just now but for years to come.

It is the most advanced rebuilding of retail systems anywhere in the world.
When completed, our business and stores will go from having the worst systems to the best, leapfrogging a generation.

And taking time to get it right is exactly the same approach we have followed to the twin challenges of convenience and on-line.

CONVENIENCE
We didn’t have any convenience stores when I arrived – and, to be honest, not even a plan for them.

This clearly had to be tackled but we were also determined to do it well.
So two years ago we began opening a small number of stores so we could learn what works.

We sited them in three types of location – close to home, close to work and in petrol forecourts.

We tested, too, how we could offer the affordable fresh food which customers have clearly said is what they want.

At the same time, we have been looking at how, when we were ready, we could scale up quickly.

The purchase of the most attractive Blockbuster, HMV and Jessops sites was a vital step towards this ambition.

Our first M local on a Blockbuster site opened this week in Merseyside but this is just the beginning of our expansion plans.

We had 12 M locals at the start of this year. That number will have doubled in the next two weeks.

It will have doubled once more by the end of next month – and doubled again by the end of the year.

In some weeks through the rest of this year, we will be opening six new stores.
And they will be in places that once you not have expected to find us.
Our new M local in Wokingham opened today.

In a fortnight, we will be opening our first Morrisons in the West End -just a couple of hundred yards down below us in New Oxford Street.

Over the coming weeks, you will see new M locals in Kensington, Westminster and Windsor as well as Kilmarnock, Derby and Blackburn.

By the end of the year, we will have 100 M locals across the country. And this rate of expansion – an average of two new shops every week – will continue into 2014.

This has also required us to improve our distribution system.

Our M locals in the south are all being supplied from our new depot in Feltham.
We are building a new depot in Bury to meet our expansion in the north.

And what our M locals are doing is bringing what people like most about Morrisons to where they work or pass on the way home.

They are distinctively Morrisons, building on what we have learnt and delivering what customers want.

Each has 50 per cent of its space dedicated to our fresh food, significantly more than offered by our competitors.

ONLINE
And distinctively Morrisons is also exactly what our online service will be from the moment you access it from your desktop, tablet or smartphone to the delivery van that arrives at your door.

As with the convenience format, there was no plan for online when I arrived.
Again we thought long and hard about how we could make this channel work for us and our customers.

Without any online expertise within our business, we realised that this was going to be difficult. So we set about getting it.

Our investment in Kiddicare provided us with an immediate route to market for general merchandise online.

Our investment in Fresh Direct has allowed us to embed a team in one of the most successful fresh food online operations in the world.

We have learnt a great deal – and we continue to learn.

And you will see these lessons put into practice when our website goes live and our vans start delivering the first orders of fresh food in a few months.
There will be a real difference which customers will notice and love.

But our involvement in these businesses also helped us realise that building an online service from scratch was not the right way forward for us.

There should be no surprise about this. Our expertise is in retailing not technology.

We don’t build our own delivery vans. We buy the best we can.

The only reason you would start from the design stage is if the technology didn’t exist or it wasn’t very good. And neither is true anymore.

We were a long way behind. Our main competitors first started on-line deliveries in the nineties.

I was not interested in catching up. I wanted to offer a better online service than anyone else.

And that’s exactly what we will have achieved through our partnership with Ocado.

I am confident it will set – and continue to set – new standards for online deliveries.

It won’t only be first class when we launch. We’ll continue to stay ahead of the field.

In fact, that’s exactly what our agreement with Ocado will ensure happens.
They have a track record of successful innovation. As they develop new technology, we automatically share it.

I hear some people say it is too expensive. I really don’t understand this.
Compared to doing nothing and letting our business go into slow but inevitable decline?

Compared to what others have paid to set up, get right and run their online service?

I can tell you that our costs are a great deal less.

Our £30 million licence fee for the IT is less than a third of what it would have cost us if we did it ourselves – and we know it works and that it will keep improving.

It took our competitors years to build an online capacity of £500 million. We have done it in a stroke.

Looking at the experience of others, doing it yourself appears to take over a decade to hit profitability.

We will achieve it in four years.

So on systems, convenience and on-line there is a great deal going on – and to bring it to life here is a short excerpt from a new film which will go up on our website.

As you can see all we are doing – in on-line, in convenience and, of course, in our core stores, will have fresh food at its heart – something which is and will remain central to Morrisons.

It was Sir Ken who had the foresight to set up Market Street when people suggested it was not what our customers wanted.

He was right then – and we are right to keep building on his legacy.

The horse meat scandal confirmed the concern people feel about where their food comes from and the complexity of the food chain.

With our unique vertically integrated food supply chain, our abattoirs, food manufacturing plants and in-store butchers, bakers and green-grocers, we are fantastically well placed to serve them.

In our stores, our M-Locals and our on-line service, we will keep innovating and setting the standards which others follow in this area.

I want to see us continue setting the lead in every area.

I predict, for example, that our competitors’ stores will be a lot more like Morrisons in the future than the other way round.

But while they may try to copy some of our innovations, it is going to be very difficult to replicate our food supply chain.

And the real battle in our sector in the future is going to be over food – where we are incredibly strong.

No one can better deliver the freshness and quality customers want, the assurance they need at the right price than Morrisons.

CONCLUSION
So let me wrap up. We know there is a lot more work to do.

In the very important areas I have just talked about, we found ourselves five even ten years behind.

While we have made real progress in closing this gap, we are not there yet. But we will have done by 2015.

Over the last three years, we have made the big strategic calls.

Because of these decisions and a great deal of pain-staking, detailed work, we now have the right building blocks in place.

We have a new team as well to deliver on our plans across the business to make Morrisons fit for the future.