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Morrisons Navigates Challenges Under Private Equity Ownership
Supermarket chain Morrisons, a Bradford-based grocer cherished by patrons for its farm-to-fork ethos and in-store fishmongers, is facing headwinds. Recent decisions to close numerous in-store services have sparked considerable concern among loyal customers and industry observers alike.
Service Reductions at Morrisons
Cafe, Counter, and Kitchen Closures
This week, the supermarket giant announced the closure of 52 cafes, 13 florists, 35 meat counters, 35 fish displays, four pharmacies, and all 18 market kitchens. These market kitchens were known for providing freshly prepared meals, and their discontinuation, along with other service reductions, marks a significant shift in Morrisons’ operational strategy.
Private Equity Acquisition and Initial Ambitions
CD&R’s Vision for Expansion
When Morrisons was acquired by US private equity firm Clayton, Dubilier & Rice (CD&R) in a substantial £7 billion leveraged buyout in October 2021, ambitious growth plans were declared. Sir Terry Leahy, former Tesco chief executive and current Morrisons chairman, played a key role in the acquisition. Leahy envisioned expanding Morrisons’ footprint, mirroring Tesco’s approach by extending its fresh, British product reach to more consumers through new stores on forecourts, high streets, and suburban locations.
Economic Realities and Margin Pressures
However, these expansion aspirations have not materialized as anticipated. Post-pandemic economic conditions, particularly elevated interest rates, have created significant financial strain on companies under private equity ownership. This is especially pronounced in the intensely competitive food retail sector, where net profit margins can be razor-thin, often below 2 percent.
Competitive Landscape and Market Challenges
Facing Retail Giants and Discount Chains
In the UK, Morrisons operates in a challenging market dominated by Tesco, a retail behemoth with immense purchasing power, and the ascendant German discount retailers Aldi and Lidl. These rivals exert continuous pressure on market share and profitability.
Avoiding Private Equity Pitfalls
Under CD&R’s stewardship, Morrisons is striving to mitigate the negative consequences sometimes associated with private equity ownership in retail. The track record of buyouts includes brand damage, value destruction, and the decline of high street retailers, evidenced by the closures of Debenhams, the collapse of Phones4U, and the demise of Toys R Us.
Asda’s Struggles Under Private Equity
Fellow supermarket Asda, owned by TDR Capital, exemplifies these struggles. Asda has experienced market share contraction amid a heavy debt burden and perceived management missteps. Recent reports indicate Asda’s financial difficulties, including manager bonus cuts and a significant pre-tax loss in 2024, largely attributed to debt servicing costs.
Morrisons’ Defense and Strategic Shifts
Denying Debt-Driven Closures
Morrisons maintains that the recent closures of cafes and counters are not driven by financial pressures from private equity ownership. The company asserts that in-store cafes have declined in popularity since the pandemic, with consumers, particularly younger demographics, preferring contemporary, quick-service dining options. Morrisons points to competitor Sainsbury’s recent closure of its in-house cafes, resulting in substantial job losses, as evidence of a wider trend.
Commitment to Supply Chain and Expansion in Wholesale
Concerns arose after the CD&R acquisition that Morrisons’ distinctive domestic supply chain might be dismantled to generate cash and reduce debt. However, Morrisons has emphasized its ongoing commitment to this model. Notably, the company invested in a £12.8 million fish freezing facility in Cornwall last year, which it claims is the UK’s largest, signaling its ambition to expand as a food wholesaler.
Debt Reduction and Financial Maneuvering
Asset Disposals and Improved Financials
To reduce its debt burden, Morrisons has engaged in financial restructuring. A significant transaction involved the £2.5 billion sale of 337 petrol forecourts to Motor Fuel Group. Additionally, a sale and leaseback agreement for its warehouse portfolio generated £370 million. Morrisons highlights that it has retained ownership of a substantial majority of its stores, preserving its asset base. These measures have reduced the debt pile to a more manageable £3.7 billion.
Positive Performance Indicators
Unlike Asda, Morrisons reported positive financial indicators in the past year. Like-for-like sales increased by 4 percent, turnover rose to £15.3 billion, underlying profits reached £835 million, and cash flow was positive at £401 million. Under the leadership of CEO Rami Baitieh, Morrisons’ growth is partly attributed to its expanding role as a supplier through online platforms, including Ocado and Amazon.
Future Prospects and Private Equity Exit
The Question of CD&R’s Long-Term Strategy
A key question for Morrisons and its stakeholders is the timing and method of its eventual separation from CD&R’s ownership, and how to ensure the supermarket’s stability and future investment. There are concerns about further asset disposals or increased debt burdens in the interim.
Challenges for Private Equity Exits
Private equity firms globally face challenges in exiting investments, holding substantial assets. Public markets show limited appetite for companies that have undergone private equity restructuring. Factors like international trade tensions have further complicated the landscape for initial public offerings, traditionally a route for private equity firms to realize returns.
CD&R’s Stance and the Future of Morrisons
While CD&R is reportedly not in a rush to sell Morrisons, there is an implicit desire to do so before the inherent culture and foundations of this distinctly British business are further eroded by financial engineering.