Financial Performance of Morrisons PLC

monetary Performance of Morrisons PLCPart 1 Project Objectives and boilers suit Research Approach1.1 IntroductionMarkets across the world ar smellwise lifting themselves out of the doom and gloom of fadeout. Most intellectual nourishment harvest-tide storages in the UK shit sh sustain congress resiliency as they try and rec all all over. Consumer sp termination and confidence have been pretty low collectable to wayward public presss created by the implementation of stringent fiscal and monetary policies by the government. The erstwhile(prenominal) couple of years have seen the lather effects of recession, hence communication channeles had to improvise and develop strategies which would accent on retaining alert customers while attracting young customers simultaneously. WM Morrison Super commercialises plc (herein later on plain Morrison) has been a success tosh amidst in wholly in all the large scale corporate peter outure and has managed to remain productive while its enemys and employmentes in general have struggled a great deal.Morrisons was founded by William Morrison in 1899, operating as an egg and exclusivelyter stall in Bradford, North West England. From its humble beginning Morrisons grew rapidly both(prenominal) in terms of its size and its product portfolio. It was except in 1967 that Morrisons was first floated on the London Stock Exchange. As per TNS spherical.com (Nov 08) Morrisons accounted for 11.8% of the natural sell super foodstuff store fate in the year 2008, making it the smallest of the big iv super commercialises. Morrisons maked predominantly in Yankee England and it was solo in 2004 that Morrisons blasted its ope balancens in the southern procedure of the UK with the acquisition of Safeway superstores.Further, as per the annual debates published in 2010, Morrisons overthrow stood at 15.4bn which was generated from 420 superstores all across the UK. Morrisons operates only if in the U K food food market.1.2 Reasons for choosing the topicMorrisons tutelage statement which states Keeping things simple has often fascinated me as to how could over more(prenominal) a massive musical arrangement operate effectively by c be things simple at all clock. Therefore I choose to break the financial statements of Morrisons PLC over a three year purpose which would fork up me answers to my personal curiosities whilst likewise completing an important seek state in my academic career. Most of the knowledge required to compile the seek inform 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 ObjectivesThis project report aims to achieve the hobby objectives digest of the fear and financial motion of Morrison PLC over a breaker point of three years i.e. from the 1st of February 2007 to 31st of January 2010.A think overive dep th psychology of the year on year performance of Morrison PLC with critical analytic thinking of the force of menstruum demarcation strategies and their adequacy to deal with future business and market challenges.Evaluation of Morrisons competitive market military position in comparison with its study competitors (with particular emphasis on J Sainsbury PLC, herein after simply Sinsburys).1.4 Research QuestionsThe project report aims to answer the drawing seek questions potency of Morrisons ope dimensionnal and financial strategies over the three year arrest in review.How well did Morrison perform in comparison to its study competitors (through the use of uninflected analysis tools much(prenominal) as ratio analysis)?1.5 Research Approach avocation is the research methodology adopted while compiling this research reportEvaluating Morrisons business performance through the use of business models such as PESTEL, SWOT and Porters 5 forces.Comparative analysis of Morriso ns PLC financial statements through the advisement of light upon ratios such as doughability, liquidity, adapt, investor returns and efficiency.Accessing Morrisons competitive position with its major competitors (primarily Sainsburys) through the ratios calculated.Part 2 training Gathering and Accounting/ Business techniques2.1 Sources of Information2.1.1 yearly Reports and Summary of financial StatementsThe main source of breeding employ for compiling the research and analysis report was the annual statements of Morrison PLC. The annual reports consisted of all the relevant financial education for ratio analysis.2.1.2 Books on interpretation of Financial and Business DataNumerous business study books and articles were read to mainly understand the scope of business give outs models and their effectiveness in analysing Morrisons performance for the break three years. Books were as well consulted to ascertain(p) key ratios and comprehend them. I also had to understand wh at the ratios meant in the retail supermarket sector and realise the limitation of ratio analyses.2.1.3 Media and Internet sourcesElectronic and print media were the most important sources of information. The annual statements were d bearloaded from the lucre and expert views on Morrisons performance were consulted from the Financial Times and other received business journals.2.2 Methods used in collecting informationThe entire research is based on secondary winding data (i.e. data quiet by someone else for their own purposes). The reasons for basing the research upon secondary resources were that no obligation to head 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 through with(p) with certain amount of scepticism (critical review) so at to ensure that the information collected presented a balanced overview. Therefore the research data was collecte d 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 trustyity to the financial information on which almost the entire report is based.As Morrison is also a cistron of London Stock Exchange independent media and expert views were avail adequate to(p) providing key insight in the companys chivalric and present performance and the future out behavior.2.3 Limitations of information gatheringAs mentioned in the earlier sections of the report the research was entirely based on secondary data thence a very slight possibility stiff that the data major power have been away and unreliable. Even though the research data has been very carefully selected the chances of delusion remain but the majority of the work can be deemed authentic and accurate.Further, the amount of information available through various resou rces was immense and in that locationfore 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 temperament and whence just reviewing past performances might non truly reflect present and future expectations.2.4 Explanation of the story and/or business techniquesThe research report focuses on evaluating the business and financial performance of Morrison over a period of 3 years. The financial side of the evaluation pull up stakes be done through the use of key performance related ratios, whilst the business performance result be examined through PESTEL, SWOT and Porters 5 forces models to prize macro and micro activities of the business.2.4.1 Business Performance2.4.1.1 PESTEL analysisPESTEL is abbreviated for Political, sparing, Social, Technological, environmental and Legal framework. jibe to Johnson et al. (2008)1 it involves an exa mination of the macro environment of an organisation with a view to identifying the factors that might dissemble a bet of vital variables that are likely to bow the organisations total and prerequisite levels and its costs.2.4.1.2 SWOT AnalysisJohnson et al (2008) states that SWOT analysis is used to appraise the companys internal strengths, weaknesses, external opportunities and affrights. Strengths and weaknesses are usually associated from processes within the company and opportunities and threats arise from factors outside the companys control.2.4.1.3 Porters 5 Forces AnalysisPorter (1980) states that it is essential for companies to have a detailed knowledge of competitors puzzle out on the market and that if a company considers the five competitive forces it pull up stakes be able to appreciate the structure of its industry and thereby be able to put it egotism in a position to withstand competitor pressure.2.4.2 Financial Performance2.4.2.1 Ratio AnalysisFinancial rat ios can be calculated by comparing two figures in the accounts which are inter-related in some way. The following ratios allow for be used to evaluate and analyse the financial performance of Morrison2.4.2.2 Liquidity RatiosBPP (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 as deals and liabilities. Creditors are likely to be arouse in liquidity ratios to assess whether they will receive the bills that they are owed. The ratios that will be calculated under this category are* up-to-date Ratio= current assets/ current liabilities,Providers of short term credit privilege a mellowed current ratio.* Quick Ratio= current assets-inventory/ current liabilityAlso commonly known as acid footrace 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 RatiosAccording to BPP (2009) stakeholders such as careholders, owners, managers, employers and potential investors are all likely to be af bonnyed in the profitability and efficiency of a business. The ratios calculated under this category will be* Return on Capital Employed= profit before bear on and tax/ not bad(p) employedThe ROCE relates to the profit generated from operating activities with the capital employed. Capital employed is mostly the net assets of the company and is also referred to as shareholders fund plus uttermostseeing term borrowings.* Gross profit margin= gross profit/ gross gross revenue * 100%Shows the gross profit made on sales turnover.* salary profit margin= net profit/sales * 100%The ratio helps to measure how well a business is controlling its overheads.2.4.2.4 Activity/ strength ratiosBPP (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 * 365 eldReceivables turnover and receivables period would be used to assess time taken by Morrisons to reclaim its short term debt on average.* Inventory Turnover = cost of sales/ inventoryAccording to BPP (2009) this ratio measures the number of times during the year a business sells the set of its stocks* Inventory holding period = inventory/ cost of sales * 365daysStock turnover can be expressed in terms of the number of days it takes to sell inventory.2.4.2.5 geartrain RatioBPP (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- impartiality ratio = total debt/ total equityThis 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 payableAccording 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 businesss ability to pay interest by comparing profit and interest payments.2.4.2.6 Investors RatioInvestors are interest 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 graded for dividendBPP (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 shareAccording to BPP (2009) the price/earnings ratio is said to reflect the confidence shown in the company It shows how ma ny 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 analysisBPP (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 followsAccounting principles followed whilst preparing financial statements should dissemble 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. therefrom the way businesses deal with there risk s vary, limiting the scope of ratio analysis.BPP (2009) states that ratios on their own are nonsensical. They have to be used as a benchmark to compare performance of the organisation a arrive atst a similar company operating in a similar industry.Certain ratios are of a subjective nature whence having standard definitions and formulae might not always be possible.Macro scotch 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 dodging and risk exposure of the company.2.6 Limitation of SWOT / PESTEL / Porters Five ForcesResults 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 firms attention on on e moment in time. Hence a SWOT analysis may ignore changing circumstances.* SWOT, PESTEL or Porters 5 Forces does not describe factors in terms of quantitative performance indicators.Part 3 Results, Analysis, Conclusions and Recommendations.3.1 PESTEL analysis3.1.1 P- POLITICALAs per the one-year Statement (2010) Morrisons did not make any political donation which is the Group policy. still this does not mean that Morrisons operation are not stirred by the political decisions made by the government in the UK. Consumer expense designer, both in the long and the short term are dictated by the governments fiscal and monetary policies. The UK economic system like most other ball-shaped 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 import ant 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 bulk to spend rather than save.Morrisons 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 let prices. Morrisons is also bound by UK and European legislations such as wellness and Safety at work Act and National Minimum net income Act.Morrisons cannot legislate for changes in government policy but should pre-empt decisions and ensure that it is spry to face challenges which might result from changes in government policies. But it is risk-free to assume that Morrisons operates within a very coherent political set up and faces no barriers to trade due to govern ments political decision making.3.1.2 E- EconomicalMorrison 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 obtain rather than spending on bounteousness step products. But as Morrison operates in the retail grocery market the assume for most of its products stay more often than not in-elastic due to the fact that people have to feed themselves and provide for their daily ineluctably no government issue how hard their budgets are squeezed. Additionally people tend to debauch solid food from supermarkets and eat at home rather than spending money in restaurants.Morrison has massively amend its own brand products which offer value for money an d appeals to consumers who are willing to buy bargain products rather than premium shade 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 Morrisons has consolidated its position in the UK market during the past few yearsTherefore it can concluded on the alkali of the to a higher place figures that Morrisons was able to enhance its position with the retail supermarket industry during adverse economic climate due to the fact it was able to supply gauge products at modest prices than its competitors.3.2.3 S- SocialThe amicable propensity in UKs 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 tell in the Annua l Statement 2010 Morrisons operates from 425 mega stores all across the UK runing 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 get more and more conscious about what they eat. Morrisons remained a step in front 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- TechnologyBusinesses 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 net profit to shop for their grocery needs therefore Morrisons has developed a very efficient (website) and robust ( speech communication 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 warehouses 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- EnvironmentalBusinesses across the world are under intense pressure to quash their carbon footprints on the environment and adopt eco-friendly and sustainable processes. Morrisons thoroughly understands its environmental responsibility and has taken important steps to reduce its carbon footprints and subsequently become GREENER. Below is a graphical archetype of decrease in Morrisons carbon footprint as stated in their Annual Review 2010 (pg14)(Source Morrison Annual Review 2010, pg 14)Morrison Annual Report and Financ ial Statements (2010) states that during the year, free reusable bags were issued to customers, and as a result of this and other initiatives crew cut bag consumption was reduced by 126 million bags.Morrisons during 2010 also completed the conversion of filling station pumps to highly efficient vapour convalescence pumps which emit much reduced levels of fuel vapour in to the atmosphere. Morrisons Halifax store was awarded an excellent rating from the Building Research Establishment Environmental sound judgment Method indicating as to how much Morrison regards the environment in which it operates.(Morrisons, 2011)3.2.6 L- LegalMorrison is cause to operate in accordance with the British and European law. It has to ensure that tire and employment laws are not compromised in handling staff affairs. all violation would result in expensive lawsuits and negative publicity. Morrison has to satisfy the token(prenominal) wage requirements.3.3 SWOT analysis3.3.1 S- StrengthsMorrison h as been regarded as one of the best providers of alert musical note food items. Morrisons business strategy of being the The food specializer for everyone distinguishes it from other grocery chains. Morrison takes immense pride in the provision of quality unused food which is prepared in-store. This allows customers to choose from a variety of merry 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 hard-hitting 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, Morrisons overall business strategy of Keeping things simple allows Morrison to concentrate on its historical strengths which is providing fresh quality food at re asonable prices.3.3.2 W- WeaknessesMorrison 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 Morrisons 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 Sainsburys (Nectar Card) are able to attract secondary shoppers and retain primary shoppers through attractive rewards.Morrison at present largely operates through megasto res whereas its competitors are increasingly investing in smaller whatchamacallit stores which are able to cater for local businesses and day to day shopping requirements. Tesco, Sainsburys 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 Morrisons profitability.3.3.3 O- OpportunitiesMorrison can further improve on its own brand products. In 2010 sales of own brand products were up by 34% indicating strong growt h. 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 fashionable 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- ThreatsAs 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 t he UK. Morrison has to ensure it remains a step ahead and continues to provide products which offer value for money or other than 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 initiation 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 wide-awake of their presence as they can easily erode in to Morrisons market share.(Source http//adage.com/article/news/u-k-supermarket-chains-feel-aldi-effect/131086/, Accessed 20th prove 2011)3.4 Porters Five Forces3.4.1 Threat of new entrantsThe threat of new entrants in to the UK retail grocery market remains largely low due to the massive amount of capital cost required and the power of the existing so called big-four. TESCO, ASDA, Sainsburys and Morrisons operate very potent marketing and advertisement campaigns making it very difficult for new entrants to gain a foot hold in the market. Following is a represented illustration of the big four dominance in the UK market(Source Morrison Annual Review 2010, pg 5)Furthermore supermarket giants like TESCO and Sainsburys operate a very in advance(p) and rewarding loyalty schemes. This ensures that customers stay loyal and do not fault to other b rands. 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.3.4.2 negociate power of suppliersAccording to the Competition Commission report published in 2008 suppliers in the grocery/retail sector have bittie or no twine 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 http//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 Morrisons brand name. As per Morrisons (2010 pg 13) the circuit card adopts a policy which is to be fair and honest in dealings with farmers and suppliers. As of 2010 Morrisons 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 customersThe 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 Morrisons 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 substitutesThe 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. Morrisons 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 employ to attract new and retain existing customers.3.4.5 Rivalry amongst competitorsRivalry amongst the top-four competitors remains very ravening 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 Morrisons market through aggressive pricing policies.Even though customers buying patterns are unpredi ctable 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 ward off aggressive rivalry by further improving on product quality and pricing.3.5 Ratio AnalysisRatios on their own are meaningless and provide little information unless they are benchmarked against something appropriate. Therefore Morrisons ratio will be