Financial Performance of Morrisons PLC

Financial Performance of Morrisons PLCPart 1 Project Objectives and general inquiry Approach1.1 IntroductionMarkets across the world atomic defy 18 gradually lifting themselves out of the doom and gloom of niche. Most foodstuffs in the UK nary(prenominal)rish shown relative resiliency as they try and recover. Consumer spending and confidence have been fairly low repayable to adverse pressures created by the implementation of stringent fiscal and m unrivalledtary policies by the government. The past couple of years have seen the worst effects of recession, hence businesses had to improvise and bring forth strategies which would focus on retaining existing guests while attracting new customers simultaneously. WM Morrison Super commercializes plc (herein afterward simply Morrison) has been a success story amidst all the large scale corporate failure and has managed to remain profitable while its competitors and businesses in general have struggled a great merchandise.Morri sons was founded by William Morrison in 1899, operating as an egg and butter stall in Bradford, North West England. From its humble beginning Morrisons grew chop-chop both in terms of its size and its product portfolio. It was only in 1967 that Morrisons was first floated on the London Stock Exchange. As per TNSglobal.com (Nov 08) Morrisons accounted for 11.8% of the positive sell supermarket plough manage in the year 2008, making it the smallest of the sorry iv supermarkets. Morrisons operated predominantly in Northern England and it was only in 2004 that Morrisons aggrandizeed its opeproportionns in the southern straggle of the UK through with(predicate) and through the acquisition of Safeway superstores.Further, as per the Annual Statements published in 2010, Morrisons turnover stood at 15.4bn which was generated from 420 superstores all across the UK. Morrisons operates entirely in the UK market.1.2 Reasons for choosing the topicMorrisons mission debate which states Ke eping things simple has often fascinated me as to how could much(prenominal) a massive organisation operate effectively by keeping things simple at all stopovers. whence I choose to analyse the financial arguings of Morrisons PLC over a three year period which would provide me answers to my personal curiosities whilst withal terminate an important interrogation key out in my academic c beer. Most of the knowledge required to compile the research report was acquired through my ACCA studies but this report took me one tint merely as it provided me with a platform from where I could apply my knowledge in a real life scenario.1.3 Project ObjectivesThis project report aims to achieve the following objectivesAnalysis of the business and financial accomplishance of Morrison PLC over a period of three years i.e. from the 1st of February 2007 to 31st of January 2010.A reflective synopsis of the year on year executing of Morrison PLC with critical analysis of the effectiveness of sure business strategies and their adequacy to deal with future business and market challenges.Evaluation of Morrisons competitive market position in comparison with its major competitors (with recrudesceicular emphasis on J Sainsbury PLC, herein after simply Sinsburys).1.4 Research QuestionsThe project report aims to answer the following research questionsEffectiveness of Morrisons operational and financial strategies over the three year period in review.How well did Morrison perform in comparison to its major competitors (through the use of analytical analysis tools such as ratio analysis)?1.5 Research ApproachFollowing is the research methodology espouse while compiling this research reportEvaluating Morrisons business carrying out through the use of business models such as PESTEL, SWOT and Porters 5 forces.Comparative analysis of Morrisons PLC financial statements through the calculation of key ratios such as profitability, runniness, gearing, investor returns and effic iency.Accessing Morrisons competitive position with its major competitors ( in the first place Sainsburys) through the ratios figure.Part 2 Information Gathering and business relationship/ Business techniques2.1 Sources of Information2.1.1 Annual Reports and Summary of Financial StatementsThe main source of information utilised for compiling the research and analysis report was the one-year statements of Morrison PLC. The annual reports consisted of all the relevant financial information for ratio analysis.2.1.2 Books on interpretation of Financial and Business DataNumerous business study books and articles were read to mainly generalise the scope of business analyses models and their effectiveness in analysing Morrisons performance for the last three years. Books were also consulted to ascertain key ratios and comprehend them. I also had to understand what the ratios meant in the retail supermarket sector and realise the limitation of ratio analyses.2.1.3 Media and Inter scratc h sourcesElectronic and print media were the most important sources of information. The annual statements were downloaded from the internet and expert views on Morrisons performance were consulted from the Financial Times and other authentic business journals.2.2 Methods used in collecting informationThe entire research is based on inessential data (i.e. data collected by someone else for their own purposes). The reasons for basing the research upon secondary resources were that no obligation to conduct primary research and the limited meter period in which the research had to be conducted and then the compilation of the report.Almost all the literature reviewed and consulted was done with certain amount of scepticism (critical review) so at to ensure that the information collected presented a balanced overview. Therefore the research data was collected from various sources. Internal focusing view was ascertained from the dilate annual statements, as the directors are responsibl e for producing such documents. A shopworn unqualified opinion by the auditors gave further authenticity to the financial information on which almost the entire report is based.As Morrison is also a constituent of London Stock Exchange independent media and expert views were available providing key keenness in the companys past and present performance and the future outlook.2.3 Limitations of information gatheringAs mentioned in the earlier sections of the report the research was entirely based on secondary data then a very slight possibility rest that the data might have been inaccurate and unreliable. Even though the research data has been very carefully selected the chances of error remain but the majority of the work can be deemed authentic and accurate.Further, the amount of information available through various resources was immense and therefore impractical to critically review all of it which might indicate that certain key information was either missed or overlooked. Al most all the information in the annual statement is historical in nature and therefore just reviewing past performances might not genuinely reflect present and future expectations.2.4 Explanation of the accounting and/or business techniquesThe research report focuses on evaluating the business and financial performance of Morrison over a period of 3 years. The financial side of the evaluation will be done through the use of key performance related ratios, whilst the business performance will be examined through PESTEL, SWOT and Porters 5 forces models to evaluate macro and micro activities of the business.2.4.1 Business Performance2.4.1.1 PESTEL analysisPESTEL is abbreviated for Political, Economical, Social, Technological, Environmental and Legal framework. harmonise to Johnson et al. (2008)1 it involves an examination of the macro environment of an organisation with a view to identifying the positionors that might affect a number of vital variables that are likely to order the organisations provision and demand levels and its costs.2.4.1.2 SWOT AnalysisJohnson et al (2008) states that SWOT analysis is used to appraise the companys internal strengths, weaknesses, external opportunities and threats. Strengths and weaknesses are usually associated from processes within the company and opportunities and threats hold water from positionors outside the companys control.2.4.1.3 Porters 5 Forces AnalysisPorter (1980) states that it is essential for companies to have a detailed knowledge of competitors influence on the market and that if a company considers the quintuple competitive forces it will be able to appreciate the structure of its industry and thereby be able to put itself in a position to stretch forth competitor pressure.2.4.2 Financial Performance2.4.2.1 ratio AnalysisFinancial ratios can be calculated by comparing two figures in the accounts which are inter-related in some way. The following ratios will be used to evaluate and analyse the financ ial performance of Morrison2.4.2.2 Liquidity RatiosBPP (2009) states that liquid stateity ratios illustrate the solvency of a business i.e. whether it is in a position to repay its short term debts. They focus on short term assets and liabilities. Creditors are likely to be concerned in liquidity ratios to esteem whether they will receive the money that they are owed. The ratios that will be calculated under this category are* Current Ratio= legitimate assets/ current liabilities,Providers of short term credit prefer a high current ratio.* Quick Ratio= current assets-inventory/ current liabilityAlso commonly know as acid test ratio, it is a more than severe test of liquidity as it does not include inventory as a liquid asset as they are not guaranteed to be sold, they may become obsolete or deteriorate.2.4.2.3 Profitability RatiosAccording to BPP (2009) stakeholders such as shareholders, owners, managers, employers and potential investors are all likely to be interested in the profitability and efficiency of a business. The ratios calculated under this category will be* Return on Capital Employed= profit before interest and tax/ roof employedThe ROCE relates to the profit generated from operating activities with the capital employed. Capital employed is generally the net assets of the company and is also referred to as shareholders fund plus long term borrowings.* Gross profit margin= tax revenue profit/sales * 100%Shows the gross profit made on sales turnover.* Net profit margin= net profit/sales * 100%The ratio helps to measure how well a business is controlling its overheads.2.4.2.4 Activity/ Efficiency ratiosBPP (2009) states that activity or asset utilisation ratios allow a business to measure how effectively it uses its resources. The ratios that would be calculated under this category will be* Receivables Turnover = credit sales/ trade receivables* Receivables period = receivables/ sales * 365daysReceivables turnover and receivables period would be used to assess time taken by Morrisons to reclaim its short term debt on average.* Inventory Turnover = cost of sales/ inventoryAccording to BPP (2009) this ratio measures the number of times during the year a business sells the pry of its stocks* Inventory safekeeping period = inventory/ cost of sales * 365daysStock turnover can be expressed in terms of the number of days it takes to sell inventory.2.4.2.5 Gearing RatioBPP (2009) states that the gearing ratio looks at the balance of funding in the capital structure of a business. Under this category the ratios that will be calculated are following* Debt-equity ratio = total debt/ total equityThis ratio establishes the total amount of shareholders fund (equity capital) in comparison to the total amount of borrowed capital (i.e. long term loans).* Interest cover = profit before tax and interest/ interest payableAccording to BPP (2009) the gearing ratio (i.e. debt-equity ratio) is a statement of financial position measure of fin ancial risk. Interest cover is an income statement measure. The ratio assesses the businesss ability to pay interest by comparing profit and interest payments.2.4.2.6 Investors RatioInvestors are interested in the returns or dividends they may get from holding shares. BPP (2009) states that a number of ratios can be used to measure these returns. The following ratios will be calculated under this category* EPS= profit available to shareholders/ no. of shares ranked for dividendBPP (2009) defines EPS as a measure of how much each share is earning. It reflects how much is available to be paid to shareholders.* Price Earnings ratio= share price/ earnings per shareAccording to BPP (2009) the price/earnings ratio is said to reflect the confidence shown in the company It shows how many years, at current earnings, it will take an investor to recover the cost of the share.* Dividend Yield= dividend per share/ market price * 100%BPP (2009) defines the dividend yield ratio as a measure of the value of the return on share for an investor. It shows the dividend per share as a percentage of the market price.2.5 Limitation of ratio analysisBPP (2009) states that ratio analysis is not inevitably a complete measure of assessing a company financial performance. Limitations that can be associated with ratio analysis are as followsAccounting principles followed whilst preparing financial statements should patch up a true and fair reflection of the company and should be consistently applied over a period of time. Ratio analysis looses its credibility when management deliberately uses accounting policies to manipulate financial statements.Businesses are hardinessd with unique risks even though they operate in the same industry. Hence the way businesses deal with there risks vary, limiting the scope of ratio analysis.BPP (2009) states that ratios on their own are meaningless. They have to be used as a benchmark to compare performance of the organisation against a similar company operating in a similar industry.Certain ratios are of a subjective nature therefore having standard definitions and formulae might not always be possible.Macroeconomic factors such as inflation rates, interest rates, changes in accounting policies and procedures are not accounted for when calculating ratios. Ratios also fail to recognise changes in corporate strategy and risk exposure of the company.2.6 Limitation of SWOT / PESTEL / Porters Five ForcesResults of SWOT analysis cannot be standardised as a threat for one organisation can be an opportunity for the other in a completely different environment.* One of the main disadvantages, as described by Dess et al (2004), is that SWOT analysis is primarily a static assessment. It focuses too much of a firms attention on one hour in time. Hence a SWOT analysis may ignore changing circumstances.* SWOT, PESTEL or Porters 5 Forces does not describe factors in terms of duodecimal performance indicators.Part 3 Results, Analysis, Conclusi ons and Recommendations.3.1 PESTEL analysis3.1.1 P- POLITICALAs per the Annual Statement (2010) Morrisons did not make any political donation which is the Group policy. that this does not mean that Morrisons operation are not affected by the political decisions made by the government in the UK. Consumer spending power, both in the long and the short term are dictated by the governments fiscal and monetary policies. The UK parsimony like most other global economies suffered adversely receivable to the global recession which was directly linked with the global credit crunch crisis. During tough economic times consumer spending power is generally low due to soaring unemployment and uncertainty in the economic environment. Government in the UK has taken important measures to stimulate growth such as reducing VAT (indirect taxation) from 17.5% to 15% in the year ending December 2009, quantitative easing (i.e. pumping money in to the economy) and keeping interest rates low, encouraging people to spend instead than save.Morrisons activities in the retail supermarket industry are regulated by the Competition Commission which keeps a close eye on the activities of the so called big four supermarkets. This ensures that supermarkets do not enter in to price wars or collude to fix prices. Morrisons is also bound by UK and European legislations such as wellness and Safety at work Act and National Minimum wage Act.Morrisons cannot legislate for changes in government policy but should pre-empt decisions and ensure that it is ready to face challenges which might result from changes in government policies. But it is safe to assume that Morrisons operates within a very coherent political set up and faces no barriers to trade due to governments political decision making.3.1.2 E- EconomicalMorrison operates only within the UK retail supermarket industry and is therefore directly affected by the macroeconomic environment. The UK economy has been under recession over the past f ew years, which means contraction in the economy, leading to unemployment and weak consumer spending power due to reduction in disposable income. The direct affect of this is that customers look for bargain shopping rather than spending on premium part products. But as Morrison operates in the retail grocery market the demand for most of its products remains largely in-elastic due to the fact that people have to feed themselves and provide for their daily needs no matter how hard their budgets are squeezed. Additionally people tend to buy food from supermarkets and eat at home rather than spending money in restaurants.Morrison has massively improved its own brand products which offer value for money and appeals to consumers who are willing to buy bargain products rather than premium quality products particularly during tough economic times. Annual Statement (2010) states Sales of our own label Value range grew by 34% as consumers tightened their belts in a dispute economic enviro nment. The following table taken from the Annual Statement 2010 further illustrates how Morrisons has consolidated its position in the UK market during the past few yearsTherefore it can concluded on the basis of the above figures that Morrisons was able to enhance its position with the retail supermarket industry during adverse economic climate due to the fact it was able to supply quality products at modest prices than its competitors.3.2.3 S- SocialThe social trend in UKs grocery market is that families shop almost regularly any week, mostly on the weekends targeting large supermarkets which provide them with all their family requirements under one roof. As stated in the Annual Statement 2010 Morrisons operates from 425 mega stores all across the UK supply towards the social trend of the market. Furthermore there is an ever growing emphasis towards health eating and a sustained fight against obesity. People are get more and more conscious about what they eat. Morrisons remaine d a step ahead of its social demands and re-launched its Eat Smart product range and as per the Annual statement (2010 pg 21) Sales were up by 7% reflecting consumers continuing demand for a healthier diet and their concern over the nutritional value of the food they eat.3.2.4 T- engineeringBusinesses across the UK are spending heavily on technological advancements, in order to gain competitive advantage over their competitors. Customers in the grocery market are increasingly using the internet to shop for their grocery needs therefore Morrisons has developed a very efficient (website) and robust (delivery system) mechanism to provide for such customers. Morrison has also launched self service check-outs in almost all of its large supermarkets resulting in improved customer service (i.e. decrease in waiting time to be served) subsequently increasing sales. Morrison is also rolling out the use of Voice-picking technology across all its grocery warehouses which has proved particularl y victorious in increasing depot productivity and pick accuracy and hence improving in-store product availability.(Grocerytrader, 2011)3.2.5 E- EnvironmentalBusinesses across the world are under glowing pressure to reduce their snow footprints on the environment and adopt eco-friendly and sustainable processes. Morrisons thoroughly understands its environmental responsibility and has taken important steps to reduce its carbon footprints and subsequently become GREENER. Below is a graphical representation of decrease in Morrisons carbon footprint as stated in their Annual reassessment 2010 (pg14)(Source Morrison Annual critical review 2010, pg 14)Morrison Annual Report and Financial Statements (2010) states that during the year, free reusable bags were issued to customers, and as a result of this and other initiatives carrier bag consumption was trim by 126 million bags.Morrisons during 2010 also completed the conversion of filling station pumps to highly efficient vapour recove ry pumps which emit much reduced levels of force out vapour in to the atmosphere. Morrisons Halifax store was awarded an excellent rating from the Building Research Establishment Environmental Assessment Method indicating as to how much Morrison regards the environment in which it operates.(Morrisons, 2011)3.2.6 L- LegalMorrison is obliged to operate in accordance with the British and European law. It has to ensure that labour and employment laws are not compromised in handling supply affairs. Any violation would result in expensive lawsuits and negative publicity. Morrison has to satisfy the minimum wage requirements.3.3 SWOT analysis3.3.1 S- StrengthsMorrison has been regarded as one of the best providers of sporting quality food items. Morrisons business strategy of being the The food specialist for everyone distinguishes it from other grocery chains. Morrison takes immense pride in the provision of quality sporty food which is prepared in-store. This allows customers to choo se from a variety of fresh food items such as baked bread, meat cut to order, fish, seasonal deli selections and a range of delicious cakes and treats. Such diverse fresh food range is a major strength of Morrison and is also widely acknowledged by its customer base. Following is an illustration of the three distinct brand values of Morrison that strengthen their vision as stated in Annual Statement 2010 (pg 6)(Source Morrison Annual Review 2010, pg 6)As it is evident from the above diagram, Morrisons overall business strategy of Keeping things simple allows Morrison to concentrate on its historical strengths which is providing fresh quality food at reasonable prices.3.3.2 W- WeaknessesMorrison only expanded its operation in the Southern part of the UK in 2004 after the acquisition of Safeway superstores and still heavily relies on the Northern part of the UK which accounts for the major chunk of the sales revenue (55%). This leaves Morrison vulnerable to any adverse fluctuations in the economic activity of the Northern part of the UK. The following illustration taken from Annual Statement 2010 (pg 7, Courtesy Kantar World panel) depicts Morrisons market share by geographical region in the UK(Source Morrison Annual Review 2010, pg 5)Morrison does not operate a loyalty scheme which rewards customers for shopping repeatedly in Morrison stores. This is a major weakness as some of the other loyalty schemes operated by competitors such as Tesco (Tesco Club card) and Sainsburys (Nectar Card) are able to attract secondary shoppers and retain primary shoppers through attractive rewards.Morrison at present largely operates through megastores whereas its competitors are increasingly investing in smaller gizmo stores which are able to cater for local businesses and day to day shopping requirements. Tesco, Sainsburys and ASDA are increasingly capturing the local convenience stores market and if Morrison does not follow suit it risks losing a major chunk of the grocery ma rket to its competitors.Morrison only operates in the UK market. Its main competitors ASDA and TESCO operate globally and are in a better position to offset their UK losses against any foreign gains whereas Morrison will have to bear the losses. The current recession indicated that developing economies such as India, Brazil and China were still posting strong growth patterns whereas the UK economy might be heading towards a double dip recession which would further dent Morrisons profitability.3.3.3 O- OpportunitiesMorrison can further improve on its own brand products. In 2010 sales of own brand products were up by 34% indicating strong growth. During tough economic times customers tend to buy value for money products rather than premium quality products. Morrison can cater for such customers and further improve its revenues.E-commerce is increasingly becoming socially popular and more and more people are shopping for their grocery needs on-line. Morrison can improve its website and develop a more robust delivery system. Hence it can improve on its revenues and market share.Morrison should expand its operations in to lucrative developing economies and take its trusted brand over to countries such as India, China, Russia and Brazil and further consolidate its position as a highly trusted supplier of quality fresh food products.3.3.4 T- ThreatsAs the current UK government aims to reduce budget deficit it is introducing austerity measures and has also increased VAT (from 17.5% to 20%), putting more pressure on disposable income. Many experts fear a double-dip recession which might prove disastrous for businesses in the UK. Morrison has to ensure it remains a step ahead and continues to provide products which offer value for money or otherwise will risk losing sales and its market share to its competitors. This is validated by the fact that there has been a significant increase in demand of value goods compared to premium goods.(Source Morrison Annual Report and F inancial Statements 2009, pg 16)Morrison so far seems reluctant to expand through convenience stores and depends largely on opening new megastores. There remains an imminent threat that Morrison might fail to seek planning liberty from local authorities and might fail to expand. But however this further advocate towards the fact that Morrison should look to expand through both megastores and convenience stores.As per the TNS report of December 2008 the market was affected from the ALDI effect, this meant people were hunting for bargain products rather than quality products at premium pricing. Even though discount brands such as LIDL and ALDI represent a very small segment of the market Morrison should remain vigilant of their presence as they can easily erode in to Morrisons market share.(Source http//adage.com/article/news/u-k-supermarket-chains-feel-aldi-effect/131086/, Accessed 20th March 2011)3.4 Porters Five Forces3.4.1 Threat of new entrantsThe threat of new entrants in to th e UK retail grocery market remains largely low due to the massive amount of capital outlay required and the power of the existing so called big-four. TESCO, ASDA, Sainsburys and Morrisons operate very powerful merchandise and advertisement campaigns making it very difficult for new entrants to gain a foot hold in the market. Following is a diagrammatic illustration of the big four dominance in the UK market(Source Morrison Annual Review 2010, pg 5)Furthermore supermarket giants like TESCO and Sainsburys operate a very sophisticated and rewarding loyalty schemes. This ensures that customers preserve loyal and do not switch to other brands. Large supermarket chains such as Morrison are able to offer significant price reductions and a large product portfolio. This also acts as a significant barrier to entry. Even though the threat of new entrants is low, Morrison has to be proactive to new controversy and steps should be taken to neutralise their affect on the market.3.4.2 Bargainin g power of suppliersAccording to the Competition Commission report published in 2008 suppliers in the grocery/retail sector have little or no influence on the big four supermarket chains. The reason for such lack of influence is that supermarket chains such as Morrison can achieve a high volume of turnover on a very short period of time and therefore can dictate product prices to their suppliers. Suppliers have little or no choice but to enter in to such agreements with large supermarkets as they ensure regular cash-inflows and large orders.(Source http//www. opposition-commission.org.uk/rep_pub/reports/2008/538grocery.htm, Accessed 27th March 2011)Morrison ensures that it has a very cordial relationship with all its suppliers as the products they supply are of a preponderating importance to the Morrisons brand name. As per Morrisons (2010 pg 13) the board adopts a policy which is to be fair and honest in dealings with farmers and suppliers. As of 2010 Morrisons average credit peri od stood at 29 days as compared to 33 days in 2009. Suppliers who constantly ensure quality products are supplied on time are disposed necessary incentives.3.4.3 Bargaining power of customersThe bargaining power of customers in the retail grocery market remains significantly high. Although the customers are not in a position to directly affect the price of an individual product but due to readily available alternatives they can alienate Morrison without any prejudice or prior notice. Therefore Morrisons has to remain very proactive when forecasting market trends and should always try and innovate ways through which it can look after its customers.3.4.4 Threat of substitutesThe threat of substitute products and retailers is significantly high as cost of switching products or suppliers is virtually non-existent. Customers in the retail grocery market do not follow a predictive trend and get disillusioned very quickly ,without any specific reason. Morrisons business strategy of Keepin g things candid and being the Food particular(a)ist goes a long way in attracting customers to its megastores all across the UK. But regular incentives such Eat Healthy, Special Offers and Discounts should also be utilized to attract new and retain existing customers.3.4.5 Rivalry amongst competitorsRivalry amongst the top-four competitors remains very aggressive and direct. Apart from the direct competition from the big four Morrison should also be vary of local (Iceland) and European (ALDI and LIDL) discount brands as they can also erode in to Morrisons market through aggressive pricing policies.Even though customers buying patterns are unpredictable but generally during tough economic times customers tend to hunt for bargains and therefore are prone to be attracted towards discount brands but Morrison should further diversify its own brand range and cater for such customers. As Morrison solely focuses on the provision of fresh quality food items it can eliminate aggressive riva lry by further improving on product quality and pricing.3.5 Ratio AnalysisRatios on their own are meaningless and provide little information unless they are benchmarked against something appropriate. Therefore Morrisons ratio will be