Bradford-based supermarket chain Morrisons has earned a special place in the affections of customers. Its reputation for selling produce from farm to fork, and from fisheries to the in-store fishmonger sets it apart from grocery rivals.
So the group’s decision this week to shutter 52 cafes, 13 florists, 35 meat counters, 35 fish displays, four pharmacies and all 18 market kitchens – which offer freshly made meals – is a source of great consternation.
When Morrisons was acquired by American private equity kingpins Clayton, Dubilier & Rice (CD&R) in a debt-fuelled £7 billion deal in October 2021 there were vaunting ambitions for the future.
Former Tesco boss Sir Terry Leahy, who helped engineer the deal and is now Morrisons chairman, saw a chance for tremendous expansion. His vision was to follow in the steps of Tesco by bringing Morrisons’ fresh, UK produce to ever more Britons with more stores on the nation’s forecourts, on busy high streets and in the suburbs.
Despite Leahy’s vision it hasn’t worked out like that. Private equity ownership, in the post-Covid era of elevated interest rates, has become an anvil around the neck of targeted companies.
Nowhere has it been more pronounced than in food retail, where net profit margins (profit after tax) can be less than 2 per cent and competition is fierce.
Fight-back: Lebanese-born Morrisons boss Rami Baitieh took over from David Potts in 2023
In Britain lesser players must compete with Tesco, the biggest beast with enormous buying power, as well as upstart German no-frills retailers Aldi and Lidl.
Under CD&R Morrison is doing its best to avoid the worst of private equity ownership of retail. The brand destruction, value erosion and High Street desolation wreaked by the buyout barons is everywhere to be seen in shuttered Debenhams stores, the implosion at Phones4U and ruins of Toys R Us.
Among the supermarkets Asda, under the ownership of TDR Capital, has seen its market share collapse under the weight of its debt and misjudged management.
This month Asda cut bonuses for managers and noted a pre-tax loss of £111.7 million in the first nine months of 2024 as its profit was dwarfed by the £440 million cost of servicing its debt.
Morrisons insists that its recent café and counter closures are nothing to do with pressure on its balance sheet from private equity ownership. It argues that in-store cafes have became unfashionable after the pandemic with younger shoppers looking for a casual Pret a Manger-style eating experience. It notes that its stock market-listed rival Sainsbury’s recently closed its in-house cafes with the loss of 3,000 jobs.
Among the biggest fears when CD&R bought Morrisons was that its distinctive home-grown supply chain would be axed to raise cash and lower debt burdens. So far that hasn’t happened. Indeed, last year it opened a £12.8 million fish freezing centre in Cornwall, described as ‘the largest of its kind in the UK’ as it builds its reach as a food wholesaler.
As Morrisons seeks to reduce debt it has done some financial engineering. The biggest transaction was the sale of 337 forecourts for £2.5 billion to Motor Fuel Group, which runs many oil company-branded petrol stations. It also executed a sale and leaseback deal on its warehouse portfolio, raising £370 million. So far it has shielded 80 per cent of its stores from sale and leaseback, sustaining its asset backing. As a result of the disposals and deals so far the debt pile has been cut back to a more manageable £3.7 billion.
In contrast to Asda, like-for-like sales at Morrisons rose 4 per cent last year, turnover climbed to £15.3 billion, underlying profits reached £835 million and there was a positive cashflow of £401 million. Growth, under the lively leadership of Lebanese-born boss Rami Baitieh, is being fuelled by its role as a supplier through its online channels which include Ocado and Amazon.
The next big question for Morrison and its stakeholders is when and how it will escape the clutches of CD&R before more bits are chopped off or reloaded with debt.
Buyout barons have a bad case of indigestion, sitting on £2.3 trillion of assets globally, while the appetite of public markets for assets that have been through the private equity wringer is limited.
The belief was that Donald Trump’s election would unleash a bull market, allowing private equity beasts to offload assets on the public markets. But his tariff wars have put hopes of a pipeline of public offerings on hold.
CD&R is said to be in no rush to sell Morrisons. But ideally it would do so before the culture and underpinnings of a distinctly British enterprise are further weakened.
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