Winston Churchill’s old aphorism that you should never let a good crisis go to waste has been clung to by many chief executives since the start of the pandemic, but few have done so with the fervour of David Potts (Ashley Armstrong writes). The Wm Morrison boss, 63, has made sure that the Bradford-based grocer stepped up to the call of feeding the nation during the panic-stricken early days of the crisis that cleared supermarket shelves and led to snaking queues outside stores.
However, the jump in demand for groceries has proved to be no flash in the pan, as lockdown stretched on and families bought more food for children who otherwise would have been at school or university and to make more meals at home. As a result, supermarkets have enjoyed record sales growth and have made a strong case that they are ultimate stock market safe havens.
Morrisons is the smallest of the “Big Four” supermarkets, with 491 stores and a 10 per cent share of the £27.48 billion food market. Unlike the rest of the large grocers, it still owns its abbatoirs, factories and food processing and packing sites and during the pandemic it has made the most of its vertical supply chain. It was the first supermarket to respond to concerns about shortages by launching food boxes, sent directly from its factories to customers the next day.
Morrisons also set up a call centre for vulnerable customers to receive next-day deliveries, when securing online booking slots had become harder than getting tickets to Glastonbury. It was also able to react to a boom in demand for online deliveries by stepping up the number of stores used to fulfil online orders using Ocado’s pick technology and is on track to make £1 billion in online sales this year.
The supermarket paid staff bonuses, gave NHS workers discounts and accelerated payments for small suppliers, partly to ensure that all were motivated. However, looking after wider stakeholders comes at a significant cost — one that might shock City investors.
Clive Black, at Shore Capital, the broker, said: “The supermarket trade not only witnessed a dramatic spike in demand, but also tremendous disruption and volatility. Some rather simplistic folks took the view that the grocers were creaming it in these disease-ridden times, but they were so wrong.”
In May Morrisons said that while it would receive £228 million in business rates relief, this would be used up by costs associated with extra safety equipment and shop staff bonuses. So while Morrisons’ sales are expected to have risen by another 10 per cent in its second quarter, its profits for the first half are expected to have fallen to about £142.5 million, compared with £198 million last year.
Morrisons might start to reap the benefits of the grocery boom in the second half: its cafés and food counters have reopened, which will mean higher-margin sales; more people are taking trips around the country, so fuel sales will increase; and it will be able to cash in the business rates holiday.
The business deferred a decision on paying a special dividend in March and, with uncertainty still clouding most economic outlooks, it’s unlikely that the supermarket will want a repeat of the public backlash that Tesco faced when paying £900 million in dividends but taking government business rates support.
Its robust balance sheet means that it can support further ordinary dividend payments. Shares in Morrisons, changing hands yesterday for 192p, remain broadly in line with where they started the year, which gives little impression of just how well the supermarket has weathered the pandemic.
Advice Buy
Why There is more opportunity for growth while crisis has proved its resilience
Witan Investment Trust
It’s not often that you hear a fund manager admit to having a “reverse Midas touch” (Patrick Hosking writes). Yet that was Andrew Bell, manager of Witan Investment Trust, issuing a mea culpa in early June after a disastrous period of underperformance.
Mr Bell had amassed a strong following after producing respectable performance for ten years, making Witan a favourite with private investors, but a botched investment shift wiped out some of that goodwill. Witan was hit by two problems: first, it was positioned for moderate economic growth in January and was vulnerable to the pandemic-triggered slump; second, while changing its benchmark to a more growth-orientated target, it phased in the underlying shift in its actual investments more slowly. Therefore it missed out on the remarkable outperformance of the America’s technology giants, which prospered on the back of billions of people working, shopping and socialising from home.
The latest half-year report puts the scale of underperformance at 12.6 per cent for the six months to June, slightly worse than the 12 per cent disclosed for the first five months. However, the company says it has now started to outperform.
Witan, a member of the FTSE 250, manages about £1.7 billion on behalf of at least 25,000 private investors and wealth managers. It is a multi-manager trust, farming out investment decisions to a carefully selected and monitored group of outside managers.
The investment case for Witan is that it is good at identifying and blending promising fund managers and disciplined about sacking them if necessary: it rid itself of three in June and has since appointed two new firms, WCM and Jennison Associates, both United States-based and both focused on growth investments.
It has raised its dividend for 45 years and would be very reluctant to end that record. It is dipping into revenue reserves to pay dividends and would not rule out temporarily tapping capital reserves, too. So long as it returns to form, the comparatively wide discount to net assets should start to narrow again.
Advice Hold
Why Serious spell of underperformance reflected in cheap-ish share price
