Morrisons- Not digging after all

Last week I wrote about the sale by Morrisons of its C stores to My Local. I suggested that this was a clever way for Morrisons to retain exposure in a capital-light manner by continuing to supply My Local on a 'franchise' basis.

Today, My Local have announced a billion pound five year supply agreement with Nisa, so I couldn't have got that more wrong!

This seems to me to be a missed opportunity for Morrisons, and something of a coup for Nisa in a business where scale is important. Without a supply agreement with My Local, Morrisons options in convenience may just have become even narrower.

That's not to say however that the direct operation v. franchise battle is not still raging; in fact it might just have intensified further.

Convenience Food - There are more ways than one of digging for money

In August I wrote about the potential sale of M Local by Morrisons. That sale has now been confirmed, 10 previously closed stores are reopening, and the business is being rebranded My Local - a great name by the way.

In its results announcement today, Morrisons said that

'Convenience remains an important growth channel, and we will continue to consider capital-light, returns-enhancing opportunities in the future.'

Back in August I also mentioned franchising as being a model that could work well for Morrisons. Using its integrated supply chain to better effect by supplying franchised convenience stores seems to make a lot of sense, and neatly fits the returns-enhancing, capital light opportunity that Morrisons is looking for.

In my view we will see the battle for a greater share of the convenience market fought on two fronts now, by direct opening of stores  by retailers; and by increasing use of franchising by national multiples to take market share from the symbol groups. Simply Food is well used to the franchise model and Tesco (using the One Stop fascia) is aiming to open over 180 franchised stores this financial year.

"There are more ways than one of digging for money."

What would a sale by Morrisons mean to M Local?

Over the weekend, rumours surfaced that Morrisons have entered into negotiations to sell M Local to Greybull Capital. That is not altogether a surprise and I have been saying to potential investors in our new C store real estate fund that an exit was a possibility.

My view is, that in the hands of the right management, there is the core of a successful business here, with 150 stores and the distribution infrastructure to service them. There is a good brand in M Local and provided a mutually beneficial supply agreement can be negotiated as part of the sale I see no reason that a 'franchised' model cannot work both for the new owners and for Morrisons.

After all, It is not a new model in the sector, with SSP Group plc running many Simply Food stores and Tesco increasingly looking to the franchise model for new One Stop openings.

It makes sense for Morrisons to concentrate its capital spend on the core large store estate and to outsource the not inconsiderable capex needed to grow the convenience business. And growth will be key, with in my view at least a doubling of the store numbers needed to achieve critical mass. With each new C store costing up to £1m to convert and fit-out, that is a significant capital commitment.

Of course it is possible that the sale is merely a prelude to a wind-up, but don't bet on it. My guess is that Greybull have long term plans for the M Local business.

Morrisons

I was interested to see that among yesterday's senior management changes was the departure of Gordon Mowat.

There has been much focus at all the grocery retailers on trading performance, but the problems are exacerbated when trading is from the wrong size stores in the wrong locations.

It is easy to blame the 'retail' teams for that, but the reality is that Morrisons, along with its competitors has long needed a property function that is at the heart of the decision making process.

In recent years, far too many retailers have been badly affected or even ceased to exist because their property strategy was too inflexible, (think HMV, Clinton Cards).

Mr. Potts is clearly taking action early to change the business and he should not hesitate to replace Mr. Mowat with a real estate professional who can properly capitalise on the Morrison's largely freehold portfolio, which remains a true competitive advantage for the business.