An Evaluation of the Business and Financial Performance of Morrisons

Part 1 Project Objectives and Overall Research Approach

1.1 Introduction

Markets across the world are gradually lifting themselves out of the doom and gloom of recession. Most markets in the UK have shown relative resiliency as they try and recover. Consumer spending and confidence have been fairly low due to adverse pressures created by the implementation of stringent fiscal and monetary policies by the government. The past couple of years have seen the worst effects of recession, hence businesses had to improvise and develop strategies which would focus on retaining existing customers while attracting new customers simultaneously. WM Morrison Supermarkets plc (herein after simply Morrison) has been a success story amidst all the large scale corporate failure and has managed to remain profitable while its competitor's and businesses in general have struggled a great deal.

Morrison's was founded by William Morrison in 1899, operating as an egg and butter stall in Bradford, North West England. From its humble beginning Morrison's grew rapidly both in terms of its size and its product portfolio. It was only in 1967 that Morrison's was first floated on the London Stock Exchange. As per TNSglobal.com (Nov 08) Morrison's accounted for 11.8% of the total retail supermarket share in the year 2008, making it the smallest of the big “four” supermarkets. Morrison's operated predominantly in Northern England and it was only in 2004 that Morrison's expanded its operations in the southern part of the UK through the acquisition of Safeway superstores.

Further, as per the Annual Statements published in 2010, Morrison's turnover stood at £15.4bn which was generated from 420 superstores all across the UK. Morrison's operates entirely in the UK market.

1.2 Reasons for choosing the topic

Morrison's mission statement which states “Keeping things simple” has often fascinated me as to how could such a massive organisation operate effectively by keeping things simple at all times. Therefore I choose to analyse the financial statements of Morrison's PLC over a three year period which would provide me answers to my personal curiosities whilst also completing an important research report in my academic career. Most of the knowledge required to compile the research report was acquired through my ACCA studies but this report took me one step further as it provided me with a platform from where I could apply my knowledge in a real life scenario.

1.3 Project Objectives

This project report aims to achieve the following objectives:

• Analysis of the business and financial performance of Morrison PLC over a period of three years i.e. from the 1st of February 2007 to 31st of January 2010.
• A reflective analysis of the year on year performance of Morrison PLC with critical analysis of the effectiveness of current business strategies and their adequacy to deal with future business and market challenges.
• Evaluation of Morrison's competitive market position in comparison with its major competitors (with particular emphasis on J Sainsbury PLC, herein after simply Sinsburys).

1.4 Research Questions

The project report aims to answer the following research questions:

• Effectiveness of Morrison's 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 Approach

Following is the research methodology adopted while compiling this research report:

• Evaluating Morrison's business performance through the use of business models such as “PESTEL”, “SWOT” and “Porters 5 forces”.
• Comparative analysis of Morrison's PLC financial statements through the calculation of key ratios such as: profitability, liquidity, gearing, investor returns and efficiency.
• Accessing Morrison's competitive position with its major competitors (mainly Sainsbury's) through the ratios calculated.

Part 2 Information Gathering and Accounting/ Business techniques

2.1 Sources of Information

2.1.1 Annual Reports and Summary of Financial Statements

The main source of information utilised for compiling the research and analysis report was the annual 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 Data

Numerous business study books and articles were read to mainly understand the scope of business analyses models and their effectiveness in analysing Morrison's 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 Internet sources

Electronic and print media were the most important sources of information. The annual statements were downloaded from the internet and expert views on Morrison's performance were consulted from the Financial Times and other authentic business journals.

2.2 Methods used in collecting information

The entire research is based on secondary 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 time 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 management view was ascertained from the detailed annual statements, as the directors are responsible for producing such documents. A standard 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 insight in the company's past and present performance and the future outlook.

2.3 Limitations of information gathering

As mentioned in the earlier sections of the report the research was entirely based on secondary data therefore a very slight possibility remains 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. Almost all the information in the annual statement is historical in nature and therefore just reviewing past performances might not truly reflect present and future expectations.

2.4 Explanation of the accounting and/or business techniques

The 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 Performance

2.4.1.1 PESTEL analysis

PESTEL is abbreviated for Political, Economical, Social, Technological, Environmental and Legal framework. According to Johnson et al. (2008)[1] it involves an examination of the macro environment of an organisation with a view to identifying the factors that might affect a number of vital variables that are likely to influence the organisations supply and demand levels and its costs.

2.4.1.2 SWOT Analysis

Johnson et al (2008) states that SWOT analysis is used to appraise the company's internal strengths, weaknesses, external opportunities and threats. Strengths and weaknesses are usually associated from processes within the company and opportunities and threats arise from factors outside the company's control.

2.4.1.3 Porters 5 Forces Analysis

Porter (1980) states that it is essential for companies to have a detailed knowledge of competitor's influence on the market and that if a company considers the “five competitive forces” it will be able to appreciate the structure of its industry and thereby be able to put itself in a position to withstand competitor pressure.

2.4.2 Financial Performance:

2.4.2.1 Ratio Analysis

Financial 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 financial performance of Morrison:

2.4.2.2 Liquidity Ratios

BPP (2009) states that liquidity 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 interested in liquidity ratios to assess whether they will receive the money that they are owed. The ratios that will be calculated under this category are:

* Current Ratio= current assets/ current liabilities,

Providers of short term credit prefer a high current ratio.

* Quick Ratio= current assets-inventory/ current liability

Also commonly known as acid test ratio, it is a more 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 Ratios

According 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/ capital employed

The 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= gross 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 ratios

BPP (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 * 365days

Receivables turnover and receivables period would be used to assess time taken by Morrison's to reclaim its short term debt on average.

* Inventory Turnover = cost of sales/ inventory

According to BPP (2009) this ratio measures the number of times during the year a business sells the value of its stocks

* Inventory holding period = inventory/ cost of sales * 365days

Stock turnover can be expressed in terms of the number of days it takes to sell inventory.

2.4.2.5 Gearing Ratio

BPP (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 equity

This 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 payable

According to BPP (2009) the gearing ratio (i.e. debt-equity ratio) is a statement of financial position measure of financial risk. Interest cover is an income statement measure. The ratio assesses the business's ability to pay interest by comparing profit and interest payments.

2.4.2.6 Investors Ratio

Investors 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 dividend

BPP (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 share

According 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 analysis

BPP (2009) states that ratio analysis is not necessarily a complete measure of assessing a company financial performance. Limitations that can be associated with ratio analysis are as follows:

• Accounting principles followed whilst preparing financial statements should represent 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 faced 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 / Porter's Five Forces

Results 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 firm's attention on one moment in time....” Hence a SWOT analysis may ignore changing circumstances.

* SWOT, PESTEL or Porters' 5 ForcesA  does not describe factors in terms of quantitative performance indicators.

Part 3 Results, Analysis, Conclusions and Recommendations.

3.1 PESTEL analysis

3.1.1 P- POLITICAL

As per the Annual Statement (2010) Morrison's did not make any political donation which is the Group policy. However this does not mean that Morrison's 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 government's fiscal and monetary policies. The UK economy like most other global economies suffered adversely due 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 rather than save.

Morrison's 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. Morrison's is also bound by UK and European legislations such as Health and Safety at work Act and National Minimum wage Act.

Morrison's 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 Morrison's operates within a very coherent political set up and faces no barriers to trade due to government's political decision making.

3.1.2 E- Economical

Morrison 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 few 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 quality 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 especially 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 challenging economic environment. The following table taken from the Annual Statement 2010 further illustrates how Morrison's has consolidated its position in the UK market during the past few years:

Therefore it can concluded on the basis of the above figures that Morrison's 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- Social

The social trend in UK's grocery market is that families shop almost regularly every 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 Morrison's operates from 425 mega stores all across the UK catering 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 getting more and more conscious about what they eat. Morrison's remained 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- Technology

Businesses 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 Morrison's has developed a very efficient (website) and robust (delivery system) mechanism to cater 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 warehouse's which has proved particularly successful in increasing depot productivity and pick accuracy and hence improving in-store product availability.

(Grocerytrader, 2011)

3.2.5 E- Environmental

Businesses across the world are under intense pressure to reduce their carbon footprints on the environment and adopt eco-friendly and sustainable processes. Morrison's 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 Morrison's carbon footprint as stated in their Annual Review 2010 (pg14)

(Source Morrison Annual 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 reduced by 126 million bags.A 

Morrison's during 2010 also completed the conversion of filling station pumps to highly efficient vapour recovery pumps which emit much reduced levels of fuel vapour in to the atmosphere. Morrison's 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- Legal

Morrison 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 staff affairs. Any violation would result in expensive lawsuits and negative publicity. Morrison has to satisfy the minimum wage requirements.

3.3 SWOT analysis:

3.3.1 S- Strengths:

Morrison has been regarded as one of the best providers of fresh quality food items. Morrison's 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 fresh food which is prepared in-store. This allows customers to choose 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, Morrison's 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- Weaknesses:

Morrison 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 Morrison's 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 Sainsbury's (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 convenience stores which are able to cater for local businesses and day to day shopping requirements. Tesco, Sainsbury's 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 market 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 Morrison's profitability.

3.3.3 O- Opportunities

Morrison 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- Threats

As 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 Financial 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 permission 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 Morrison's market share.

(Source: https://adage.com/article/news/u-k-supermarket-chains-feel-aldi-effect/131086/, Accessed 20th March 2011)

3.4 Porter's Five Forces

3.4.1 Threat of new entrants

The threat of new entrants in to the 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, Sainsbury's and Morrison's operate very powerful marketing 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 Sainsbury's operate a very sophisticated and rewarding loyalty schemes. This ensures that customers stay 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 competition and steps should be taken to neutralise their affect on the market.A 

3.4.2 Bargaining power of suppliers

According 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: https://www.competition-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 paramount importance to the Morrison's brand name. As per Morrison's (2010 pg 13) the board adopts a policy which is to be fair and honest in dealings with farmers and suppliers. As of 2010 Morrison's average credit period stood at 29 days as compared to 33 days in 2009. Suppliers who constantly ensure quality products are supplied on time are given necessary incentives.

3.4.3 Bargaining power of customers

The 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 Morrison's 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 substitutes

The 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. Morrison's business strategy of “Keeping things Simple” and “being the Food Specialist” 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 competitors

Rivalry 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 Morrison's 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 rivalry by further improving on product quality and pricing.

3.5 Ratio Analysis

Ratios on their own are meaningless and provide little information unless they are benchmarked against something appropriate. Therefore Morrison's ratio will be benchmarked against Sainsbury's as it represents a major competitor and operates within the same industry facing similar kind of risks and rewards. Morrison's ratio will also be compared with previous year figure in order to achieve a relative trend in the financial performance over the past three years

3.5.1 Liquidity Ratios

		2008	2009	2010
Morrison	Liquidity Ratios
	Current Ratio	A A A A A A A A A A  0.49	A A A A A A A A A A  0.53	A A A A A A A A A A  0.51
	Acid test Ratio	A A A A A A A A A A  0.25	A A A A A A A A A A  0.28	A A A A A A A A A A  0.24
Sainsburys	Liquidity Ratios
	Current ratio	0.62	0.54	0.64
	Acid test Ratio	0.36	0.30	0.39

3.5.1.1 Current Ratio

An increasing trend can be observed in Morrison's current ratio from 2008 to 2010(Appendix C). The current ratio indicates the ability of Morrison's PLC to pay its short term liabilities from its short term assets. On the contrary Sainsbury's current ratio has seen a see-saw effect going from 0.62 to 0.54 to 0.64 from 2008 to 2010(Appendix F). It is also worth considering that Morrison's operates almost entirely on cash and carry business approach and also adopts a very aggressive selling approach therefore little inventory is left over.

3.5.1.2 Acid Test Ratio

Acid Test ratio of both companies reveal a similar trend as the current ratio:A  a small increase in 2009 for Morrison and a small dip in 2009 for Sainsbury's. Acid test ratio is a much more stringent test of liquidity as it removes stock or inventory from the calculations in order to reveal the instant solvency of Morrison / Sainsbury's. The numbers represent the fact that the stock constitutes almost 50% of the current assets (577/1094=53%) in the three years on average which fulfils Morrison's sales intensive approach. This also points out towards the fact that almost all goods sold are financed by creditors (i.e. suppliers).

3.5.1.3 Reasoning

The decrease in the current and acid test ratio of Morrison from 2009 to 2010 can be attributed to the increase in financial liabilities from £1 m in 2009 to £213 m in 2010. This increase in bank loans has been due to aggressive expanding strategy of Morrison where they have opened 19 new Co-op/Somerfield Stores in the first half of 2010.

(Source Morrison Annual Report and Financial Statements 2010, pg 60)

Opening new stores does require a large capital expenditure hence increasing gearing ratio, but this also means that more cash is required to buy stocks that will be sold in those supermarkets.A  From 2007 to 2010 Morrison has opened a total of 57 new stores nationwide under their strategy of “National to Nationwide”.

The following picture explains the increase in Morrison stores from 2007 to 2010:

(Source Morrison Annual Report and Financial Statements 2010, pg 7)

3.5.2 Profitability Ratios

		2008	2009	2010
Morrison	Profitability Ratios
	Return on capital employed (ROCE)	13.98%	14.85%	18.33%
	Gross Profit Margin	6.31%	6.28%	6.89%
	Net Profit Margin	4.72%	4.62%	5.89%
Sainsburys	Profitability Ratios
	Return on capital employed (ROCE)	10.74%	15.38%	14.30%
	Gross Profit Margin	5.62%	5.48%	5.42%
	Net Profit Margin	2.97%	3.56%	3.56%

3.5.2.1 Return on Capital employed

Morrison's return on capital employed has increased from 2008 to 2010 from 13.98% to 18.33% (Appendix C). Comparatively Sainsbury's ROCE has only increased marginally from 10.74% to 14.30 in the years 2008 to 2010 (Appendix F). The ROCE indicates the percentage of profit made on capital invested; hence a higher value of ROCE indicates efficient use of capital and a lower value vice versa. Morrison's average ROCE for 2008 to 2010 is 15.72% and that of Sainsbury's is 13.47%, revealing more profitability in Morrison. The improvement in Morrison's ROCE is good news for both existing and potential shareholders.

3.5.2.3 Gross Profit margin

Morrison's gross profit margin (GPM) was calculated as 6.31%, 6.28% and 6.89% for 2008, 2009 and 2010 respectively (Appendix C). Gross profit margin indicates the profit margin achieved by Morrison's on it sales revenue after deducting direct costs. Sainsbury's on the other hand had a GPM of 5.62%, 5.48% and 5.42% in 2008, 2009 and 2010 respectively(Appendix F). This indicates Morrison's has adopted a much stringent cost control mechanism, compared to Sainsbury, while being profitable at the same time.

3.5.2.4 Net Profit Margin

Morrison's net profit margin (NPM) has increased from 4.72% in 2008 to 5.89% in 2010(Appendix C). The increase in NPM of Morrison's in 2010 can be largely attributable to reduction in administrative (overhead) expenses. This is achieved by minimising waste and maximising efficiency in individual cost centres.

3.5.2.5 Reasoning

One of the main reasons for the increase in the profitability of Morrison's is its ever increasing market share that has been climbing from 11.9% in 2007 to 12.6% in 2010. As per Morrison's Annual Report and Financial statements 2010 “...total average basket sizes increased by 2.4% and customer numbers were up 6.7%. On average 10.5m customers are now visiting our stores each week...” This is confirmed by the fact that the UK grocery market has increased by 4.7% in 2009/10 and in that increase Morrison's percentage increase has been 9.1%.

(Annual Report and Financial Statement 2010, pg 5)

3.5.3 Efficiency Ratios

		2008	2009	2010
Morrison	Efficiency Ratios
	Receivable turnover (times)	A A A A A A A A  65.17	A A A A A A A A  59.30	A A A A A A A A  76.67
	Receivable collection period (days)	A A A A A A A A A A  5.60	A A A A A A A A A A  6.16	A A A A A A A A A A  4.76
	Inventory turnover times	A A A A A A A A  29.34	A A A A A A A A  29.41	A A A A A A A A  26.71
	Inventory turnover in days	A A A A A A A A  12.44	A A A A A A A A  12.41	A A A A A A A A  13.67
Sainsburys	Efficiency Ratios
	Receivable turnover (times)	86.59	96.98	92.86
	Receivable collection period (days)	4.22	3.76	3.93
	Inventory turnover times	26.19	27.45	28.44
	Inventory turnover in days	13.94	13.30	12.83

3.5.3.1 Receivable turnover and receivable collection days

Morrison's receivable collection days has decreased from 5.6 to 4.76 in the years 2008 to 2010(Appendix C). This is because Morrison's rarely sells its grocery and food products on credit. Hence the amount of receivables and the time taken to recover the receivables is low. In comparison while Morrison's receivable period averaged 5.51 days that of Sainsbury's averaged 3.97 days(Appendix C and F).

3.5.3.2 Inventory turnover

The inventory turnover in times has of Morrison's has decreased from 29.34 to 26.71 times in the years 2008 to 2009(Appendix C). On the contrary that of Sainsbury's has seen the opposite effect of increasing from 26.19 to 28.00 times(Appendix F).A 

3.5.3.3 Reasoning

The decrease in the receivable days indicates efficient credit control procedures. The advantage of having a lower value for this ratio is that, the lower it is the more Morrison can invest and earn interest or pay up their trade creditors. The decrease in the inventory turnover days can lead to the conclusion that since 2008 to 2010, either Morrison has raised its price or their customers have started buying more premium products.

This observation can be supported by Morrison's claim that the sales growths of their value products have seen a dip in 2009 with growth in their premium products as UK tries to come out of recession.

(Source: Annual Report and Financial Statements 2010 , Morrison, pg 5)

3.5.4 Gearing Ratios

		2008	2009	2010
Morrison	Gearing Ratios
	Gearing	A A A A A A A A A A  0.32	A A A A A A A A A A  0.37	A A A A A A A A A A  0.34
	Interest Cover (times)	A A A A A A A A  10.20	A A A A A A A A  11.18	A A A A A A A A  15.12
Sainsburys	Gearing Ratios
	Gearing	0.41	0.50	0.47
	Interest Cover (times)	4.02	4.55	4.80

3.5.4.1 Debt/equity ratio

Morrison's gearing stood at 34% in 2010, 37% in 2009, and 32% in 2008(Appendix C). This indicates that the company's operations are funded largely by equity capital rather than debt capital. It also means that for every £1 invested by the equity holders 0.34 pence were invested by borrowed capital. Sainsbury's gearing on the other hand was calculated as 47% in 2010 and 50% in 2009(Appendix F)

3.5.4.2 Interest Cover

This was calculated as 15.12 times in 2010 and 11.12 times in 2009(Appendix C). The relative stability in interest cover ratio is very encouraging and guarantees a good credit rating for the company before its financiers.

3.5.4.3 Reasoning

Even though Morrison's gearing is in line with industry expectations but it can be argued that borrowed capital is easier than raising capital. Morrison's net debt has increased significantly during the past three years as depicted above. The small increase in 2009 is due to organic growth of Morrison in 2009, where they opened 11 organic stores and 34 former Co-op/Somerfield stores opened (preliminary results 31 January 2010). This led to Morrisons taking in heavy long term loans hence increasing their gearing ratio in 2009.

(Source: Annual Report and Financial Statements 2010, Morrison, pg 25)

3.5.5 Investors Ratios

		2008	2009	2010
Morrison	Investor Ratio
	Earnings per share (pence)	A A A A A A A A  20.79	A A A A A A A A  17.39	A A A A A A A A  22.80
	Price/earnings ratio	A A A A A A A A  13.90	A A A A A A A A  15.57	A A A A A A A A  13.13
	Dividend per share (pence)	A A A A A A A A A A  4.80	A A A A A A A A A A  5.80	A A A A A A A A A A  8.20
	Dividend Yield	1.66%	2.14%	2.74%
Sainsburys	Investor Ratio
	Earnings per share (pence)	19.14	16.62	32.10
	Price/earnings ratio	19.69	17.63	10.45
	Dividend per share (pence)	11.4	13.2	14.2
	Dividend Yield	3.02%	4.51%	4.24%

3.5.5.1 Earnings per share

Morrison's earnings per share were calculated as 22.8, 17.4 and 20.8 pence for 2010, 2009 and 2008 effectively(Appendix C). After a slight dip in 2009 which meant shareholders were losing on their wealth Morrison's has posted a strong EPS in 2010 indicating to its equity shareholders that they will increase their wealth if they continue to invest in Morrison. Comparing that to Sainsburys' EPS, we can see an immense increase in its value from 2008 to 2010(Appendix F).

3.5.5.2 Price earnings ratio

Price/earnings ratio indicates the amount of time in years it would take Morrison's equity shareholder to recover their investment at current earnings. Morrison's PE ratio was calculated as 13.13, 15.57 and 13.90 times in 2010, 2009 and 2008(Appendix C). The decrease in PE ratio could be largely attributable to the fall in share prices as a result of uncertainty faced by the investors in both the UK and global markets. A similar trend is observed in the P/E ratio of Sainsburys from 2008 to 2010(Appendix F).

3.5.5.3 Dividend Yield

Morrison's dividend yield was calculated as 2.74, 2.14 and 1.66% in 2010, 2009 and 2008(Appendix C). After retaining profits in 2009 and 2008 Morrison's is willing to give more profits as dividends to its equity shareholders. It must be noted that profits retained are utilised for business development and expansion.

3.5.5.4 Reasoning

The dip in 2009 could be largely attributed to very tough business environment which meant contraction in demand and consumer purchase power. Although a decrease in EPS and P/E ratio is observed Morrison's dividend Yield has increased significantly from 1.66% to 2.74%(Appendix C). This can be confirmed by the diagram below from its Annual report and financial statements 2010.

(Annual Report and Financial Statements 2009, pg15)

The following graph portrays Morrison's share price compared to Sainbury's and its other competitors.

3.6 Conclusion and Recommendations

Morrison's financial and business analysis presents a very healthy position. Morrison's key ratios present a very good picture to both its existing and potential shareholders. Morrison's is also improving on its year on year profits and liquidity figures. In terms of macro business environment Morrison' operates in a very cordial and coherent infrastructure which supports growth and competition which are vital to improve effectiveness and efficiency. Government in the UK is taking positive measures to enhance economic growth and improve customer purchasing power. Morrison's has been strong during the recession and should consolidate its position further when the UK economy shows signs of growth. Morrison's has always been true to its traditions and despite the temptations to diversify in non-food products it continues to remain resilient and offers best quality fresh food to its customers.

Morrison's at present only operates in the UK market and has only recently diversified its business in the southern part of the country. They are a trusted brand in North of England but hard work and dedication is required to acquire such status in other parts of the country. They also face stiff competition from rival retailers such as Tesco, Sainsbury's and ASDA in the UK market. Therefore Morrison's should aim to diversify its business into lucrative developing markets such as China, Russia and India. The opportunities in these markets are enormous and through the use of the right product mix and advertising campaigns Morrison's can further improve its profitability.

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