At the end of last year, Morrisons dropped out of the FTSE 100 after fourteen years of being ever present. Who could have conceived that its demotion could have been so short-lived, as it looks to pass Sports Direct (LON:SPD) on the way down, having seen its share price rally sharply since the beginning of the year?
In the wake of its December demotion the share price did drop briefly, but since the December lows the share price has rallied over 40%, helped by some better than expected Christmas trading numbers at the start of January. This appears to have been the catalyst for a slow share price recovery that was helped in mid-February by some rumours about the possibility of the supermarket becoming a bid target for private equity amongst other possibilities.
This week’s full year results could well reinforce the current turnaround story seen since the beginning of the year, though this week’s Kantar update would appear to suggest that Morrisons is still lagging behind.
Given its position as the weakest of the big four supermarkets and its tardiness in developing its online offering, the prospect of a bid did seem a little far-fetched, particularly given its market share continues to come under pressure from the young pretenders of Aldi and Lidl, as well as the prospect that Amazon (NASDAQ:AMZN) was looking to come in and disrupt the sector further.
This was probably why its sector rival Sainsbury took the big decision to expand its delivery network capability by extending its partnership with Argos owner Home Retail. In order to stay relevant in an increasingly on line world the major supermarkets are looking at more creative ways to retain market share.
While concerns about an Amazon entry into the groceries sector were justified given its history as a disrupter, the biggest obstacle for the online giant was always going to be what I call the feel, or freshness factor. Shoppers like to know the quality and feel of any fresh food and vegetables they buy, and at least be confident about the source of them.
One of the drawbacks about home delivery is the fact that the grocery pickers always used to pick out the shortest date and ripest products, meaning they became out of date very quickly.
Whatever Morrisons' faults, their groceries offering is good, which is why last week’s bombshell that Morrisons had inked a supply deal with Amazon to supply its Pantry grocery service was such a surprise.
As part of this deal Amazon Prime customers will get any grocery deliveries free of charge, and it really ups the ante with Tesco (LON:TSCO), Sainsbury and Asda, particularly given that the grocery sector is among one of the stock markets most shorted sectors.
The big question now is whether this deal marks the beginning of a turnaround for Morrison’s share price as it looks to hit the comeback trail. The odds have certainly shifted in its favour, as evidenced by the sharp additional uptick in the share price over 200p in the last few days.
More importantly, does this deal mark the beginning of a new phase in online retail and will it trigger counter moves from the rest of the industry?
It is instructive that in the aftermath of the announcement of the prospective Sainsbury deal with Home Retail, the initial reaction was one of cynicism that the deal could work, and yet here we are nearly two months down the line and there is the prospect that the deal might be hijacked by Steinhoff, a South African furniture retailer, who own Bensons for Beds.
With both Morrisons and Sainsbury’s taking action to diversify and reinforce their business models, Tesco appears to be going in the opposite direction, as it looks to cut jobs and considers cutting superfluous parts of the business, as well as some of its more unprofitable large stores.
Tesco still by far has the biggest share of the UK grocery market, but its glacial progress in dealing with its underlying structural issues is leaving the ground open to its peers to reduce that market share further.
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