UK's Morrisons says will close gap on rivals by 2015

LONDON, July 11 Thu Jul 11, 2013 11:42am EDT

LONDON, July 11 (Reuters) - Britain's No. 4 grocer Wm Morrison Supermarkets on Thursday pledged that by 2015 it would have the technology systems, online presence and convenience stores to have significantly closed the gap on its larger rivals.

The company, which trails Tesco, Wal-Mart's Asda and J Sainsbury in annual sales, has seen profits and market share dented by its late entry into the online grocery and convenience store markets - which are growing in Britain at about 16 percent and 20 percent a year respectively.

Presenting a strategy update Dalton Philips, chief executive since March 2010, defended his record.

"I've only been here three years. There was no plan for online, there was no plan for convenience and we had systems which were 20th century," he said.

He said three years on, the firm was getting "21st century" systems, including for accounting, supply chain management and automated cash-handling, through a 300 million pounds ($448 million) investment.

It was aggressively opening "M local" convenience stores, with a target of 100 by the end of the year, he said, and had secured 500 million pounds of online grocery capacity "at a stroke" through a tie-up with Ocado.

Tesco has more than 1,700 convenience stores, by comparison, and Sainsbury over 500 and having been selling groceries online for over a decade.

"We found ourselves five, even 10 years, behind. While we have made real progress in closing the gap, we are not there yet, but we will have done so by 2015," Philips said.

DEFENDS OCADO DEAL

Morrisons agreed in May to invest over 200 million pounds in a 25-year deal with online grocer Ocado that will see the firm start home deliveries by the end of the year.

Some analysts have said Morrisons is overpaying and have questioned the length of the contract in a fast-changing market. And while Ocado's shares have recently hit record highs, Morrisons have been flat over the last quarter.

"I hear some people say it's too expensive, I really don't understand this," said Philips.

"Compared to what others have paid to get set up, get right and run their online services, I can tell you that our costs are a great deal less."

Philips said that while rivals had taken over a decade to make online grocery profitable, Morrisons would do it in four years.

Finance Director Trevor Strain defended the length of the deal and pointed out that the contract has built-in protections for Morrisons.

He said if it was established that what Ocado was providing was no longer "industry-leading", Morrisons could exit the deal. "With that context around that protection I think you actually look at the 25-year agreement in a different way," said Strain.

In May Morrisons, based in Bradford, northern England, posted a 1.8 percent fall in sales at stores open over a year, excluding fuel, for its first quarter. It expects like-for-like sales to remain negative in the 2013-14 year.

Despite recent survey data showing a pick-up in Britain's economic outlook, Philips said trading conditions in the grocery market remained tough.

"This market is very, very competitive. I'm under no illusion that it is suddenly going to get any easier," he said.

Shares in Morrisons were down 0.1 percent at 281.6 pence at 1535 GMT, valuing the business at 6.6 billion pounds.