Dalton Philips Q&A: 'There is a real opportunity to romance the customer more'

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This week’s guest editor, Morrisons CEO Dalton Philips, talks to Ronan Hegarty about a “fantastic” first year, driving the fresh food advantage, and those labs…

Morrisons CEO Dalton Philips talks to Ronan Hegarty, News Editor of The GrocerQ: How has your first year in charge at Morrisons been? A: It’s been a fantastic experience. It’s a great company with a lot of opportunities. I was provided with a lot of time to do a really thorough induction. I spent the first six months getting to know the business and why it is so successful and spent the next six months developing the plan to make it better. Q: What’s your take on the annual results you posted earlier this month? A: We had underlying earnings up 13% and the dividend up by 17%. These are the among the strongest results anyone will report this year. <crosshead />Q: You mentioned in the prelims some low-hanging fruit. What are these opportunities and are they ones a retailer can see rather than a marketer? A: There are opportunities to go further, so we’ve talked about opportunities to drive our sales, where we can take costs out of the business, and new areas to expand sales. In terms of our fresh food lead how do we differentiate ourselves further? We’re the only business in the UK that has such an extensive amount of craft skills we have more butchers, bakers, fishmongers than all the other big four together and it’s a real point of differentiation. We have a vertically integrated supply system so produce more than 50% of the fresh foods we sell. It’s about how we drive our manufacturing capabilities further to drive sales. We also have big opportunities in driving our own brand it’s a £6bn business, but how do we go further and really differentiate? We have targeted £100m of efficiencies in the next three years. Through our Evolve systems project we are putting in the best software suite in the world. This will take another £100m of costs out of our business. And other growth opportunities are c-stores and online. <crosshead />Q: Can you say more on cost savings? A: We have one store in York where we are testing all our ideas. We brought all our store managers together and they came up with more than 740 ideas for ways to make their stores even more efficient. Those ideas are tested in York and once we are happy with them we can scale them out through the network. We’ve got a number of initiatives going on at the moment from not gap-filling a much more efficient way of replenishing, because if there isn’t a product we leave a gap through to merchandising bananas in hammocks as opposed to pricing them all. There are a number of different initiatives and they are all scaleable. And in many cases they are ideas our competitors are already doing, so to some extent they are catch-up and therefore low risk. Q: You’ve confirmed a £1bn share buyback. What was behind this? A: We have one of the strongest balance sheets in the world. We are AAA-rated by Moody’s but we also want to have an efficient balance sheet. We have consulted with our shareholders and we felt this was the right time to embark on a share buyback. It’s something the company has done in the past and it’s been very well received. Q: Is this at the expense of developing stores or putting money back into lower prices for customers? A: We have capacity to invest more than £1bn a year in cap-ex at the same time as the share buyback, and it still gives us about £1.2bn headroom on our balance sheet for further growth. Our balance sheet is so strong we can do a number of different things at the same time. <crosshead />Q: There are seven million UK households without easy access to a Morrisons. What areas have you identified for expansion? A: Morrisons’ store footprint is stronger in the North than the South. In London our market share is 6.5% so we have big opportunities to take the Morrisons offer to more households, and cannibalisation is zero in those cases. We have been building up our property division in the South and because we are running a smaller footprint of 30,000 sq ft to 40,000 sq ft we are finding many towns where we can get in and the planners want us because we are bringing real jobs. <crosshead />Q: On the wider economy, what is Morrisons doing to help cash-strapped shoppers? A: We’re focused on giving value to customers through very strong shelf pricing. We also work with our suppliers to make sure we can offer industry-leading promotions. The business does that very effectively and that’s been driving the growth ahead of the market and it’s working. Our average consumer has got about £100 less per month in the household budget. They are looking for deals and we make sure we’ve got them. <crosshead />Q: What impact has the supermarket price war had since January? A: We came out first in January with the price crunch when we lowered the price on more than 2,000 items. That was the first large pricing activity of 2011. A number of competitors have come out with their own different initiatives we believe in good, honest pricing at the till and no gimmicks, so are providing the best price for shoppers. It’s all about great value and that’s why you see today, for example, that our market share in meat is regularly the second-largest in the country because we are delivering that value to customers. <crosshead />Q: What about your trial stores/labs? A: Well, we are doing a lot with our fresh food lab in Kirkstall giving more space to fresh foods and doing a lot more to show the craft skills going on. In our butchers we have taken all the walls down so customers can see all the food preparation. We have another lab in Shrewsbury where we are liberating space. We think there is up to 750,000 sq ft of space that can be freed up in the network by better use of space. In that store we took out 1,600 items that allowed us more space for convenience products, home and leisure, and kids’ clothing. Customer response has been fantastic. That’s an opportunity we can roll out. <crosshead />Q: When can we expect that? A: At the end of the summer we will combine the learnings of our fresh food lab with the liberate lab and the work we have been doing in York around productivity. Those will come together into one lab we will test that to see how it works and make sure customers are reacting as positively as we feel about it. Then next year we will start rolling it out through the network. I’m feeling very good about the momentum in the business and you’re seeing it in the results. Q: Some visitors to Kirstall have been reminded of Loblaw. A: There is a real opportunity to romance the customer more. Retail is a global village and we’ll take ideas from many different places. There are influences in Kirstall from different retailers around the world, not just Loblaw. <crosshead />Q: Fresh will be at the heart of your convenience trail. How will you succeed where others struggled? A: Convenience customers are looking for fresh food and availability in a clutter-free environment, and they want value. So we think Morrisons is uniquely positioned in our Morrisons Local trial to bring fresh food into a convenience environment. We are unusual because we are vertically integrated, and thus have an angle to provide great fresh foods at a really good price. We’ll be very focused on wastage but because we manufacture it ourselves, that gives us a speed to supply stores quicker. <crosshead />Q: And you’re venturing online with the Kiddicare and FreshDirect Deals, of course. A: With Kiddicare this isn’t about trialling we are going online. We don’t want to be building big boxes for non-food. We see non-food moving online and we’ll be able to provide a good offer through Morrisons.com and we’ll launch that next year. Food is a very different proposition. The best online fresh food retailer in the world is FreshDirect. Embedding a team there is a smart way to understand how we can develop our own online business, which we’ll develop in 2013. Q: You’ve also mentioned fashion as an opportunity and there are rumours of talks with George Davies. A: Customers tell us they want longer store opening hours and a kids offer in shops. We are moving on the store opening times after Easter. In terms of the kids’ clothing range, we are trialling an offer with our partners Peacocks in four stores, and it’s going very well. We haven’t yet made a decision on how we are going to roll that out it’s still very early days. Q: You have made a lot of senior appointments in the last year including a strategy director is that not your job? A: A business of our size is well served by having a strategy director. Gordon Mowat has an incredible affinity with the retail business and will really help us. <crosshead />Q: There is also Richard Hodgson and own brand director Belinda Youngs. A: We have a very strong team we’ve moved from a management board of four to one of 10 so the core team is bigger, including both people we’ve brought in and people we’ve promoted internally. There’s a real opportunity to grow in this third chapter of the business you do that with great people. I believe we have the strongest management team anywhere. <crosshead />Q: Last week Morrisons signed up to the Responsibility Deal. How do you see your role in that and the wider issue of the Big Society? A: We were very quick to sign up. I believe very strongly in doing our part to ensure we are helping our customers to eat better, and the same with the Big Society. We will give the government every bit of support we can. View more<a href="/articles.aspx?page=articles&ID=216989">Dalton Philips on his new top team</a> Dalton Philips talks us through the changes to Morrisons’ senior line-up after a busy few months of recruiting – and outlines the challenges facing own-brand director Belinda Youngs. <a href="/articles.aspx?page=articles&ID=216989">Watch the video</a><a href="/articles.aspx?page=articles&ID=216990">Dalton Philips on the future for Morrisons</a> The Morrisons boss explains his thinking behind the Kiddicare and FreshDirect deals, how he views Morrisons’ online offer going forward and his plans to develop a kids clothing range. <a href="/articles.aspx?page=articles&ID=216990">Watch the video</a><a href="/articles.aspx?page=articles&ID=216992">Dalton Philips answers readers’ questions</a> Morrisons chief executive, Dalton Philips answers your queries on store development, convenience and his plans to increase the number of women in the supermarket’s boardroom. <a href="/articles.aspx?page=articles&ID=216992">Watch the video</a><a href="/articles.aspx?page=articles&ID=216991">Dalton Philips on the state of the grocery market</a> The Morrisons chief executive discusses the supermarket price wars and his take on the economy, as well as what Morrisons is doing to improve its offer in those high-tech labs of his. <a href="/articles.aspx?page=articles&ID=216991">Watch the video</a>

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Dalton Philips Q&A: 'There is a real opportunity to romance the customer more'

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