Morrisons (MRW) is the fourth-largest grocer in the United Kingdom, but in contrast to its larger peers, it operates a vertically integrated supply chain with more than 15 manufacturing facilities and more than 10 distribution centres.
Morrisons will benefit from its convenience store rollout
These capital-intensive manufacturing operations pose a barrier for new entrants to overcome and give Morrisons greater control over product quality. Morrisons attempts to differentiate itself and capture the retail and manufacturing margin by touting the quality of its fresh food offering. However, we do not assign Morrisons an economic moat because we don't think it possesses a sustainable cost advantage or enough brand equity to sustain material price premiums.
The U.K. grocery industry is highly consolidated, with Tesco, Asda, Sainsbury's and Morrisons controlling a large portion of this £170 billion market. The industry is also very competitive, and rivalry has intensified over the past few years. Most firms spent the better part of the past decade increasing square footage to drive sales growth, but some of these investments failed to produce expected returns once the global economy began slowing and consumers started spending more money in alternative channels.
Morrisons has lost share owing in part to its late entry into the online and convenience store channels, but we're optimistic that the firm should benefit from its convenience store rollout and its new partnership with online distributor Ocado. It has taken competitors several years to build out online capabilities, and this partnership makes sense for Morrisons because it gives the firm an instant presence online while reducing the execution risk associated with building a platform from scratch.
Although channel expansion is a plus, the threat posed by discounters Aldi and Lidl is unlikely to subside. These no-frills concepts are leveraging lacklustre economic growth to expand aggressively, challenging Morrisons because it has more demographic overlap with the discounters. We expect Morrisons to compete with these firms by lowering prices and highlighting its in-store service, fresh food, and product assortment.
