Morrisons chief sets great store by its food

FRIDAY INTERVIEW:Dalton Philips, chief executive of Morrisons

ON HIS first day as chief executive of Morrisons in March last year, Wicklow-born Dalton Philips stood on the stairs in the main hall of Morrisons’ Bradford headquarters to address 2,500 staff.

Back then, he was a surprise appointment – experienced internationally, but an unknown in UK retail. Like other chief executives, he made the usual commitment to staff that his door would always be open.

Unusually, perhaps, he took his mobile phone out of his pocket and gave out his number.

The story is told not by the 43-year-old executive, but by one of the company’s drivers, a man who started work in the first self-service supermarket set up by the company’s founder Ken Morrison in 1958, and, now beyond retirement age, still works today, by choice.

Philips, who lives in York with his wife, Penny and children, leads a company that holds a 12 per cent and growing share of the UK’s supermarket trade. In doing so, it has concentrated on food, rather than drifting into non-food goods.

“We are incredibly vertically-integrated. There isn’t a retailer like us anywhere else,” Philips says. “We have our own slaughterhouses, we have our own bakeries, we have our own cooked-meat plants. We bought a flower business earlier this year.”

Despite higher sales and a rising share price, Philips, like other retailers, is coping with major changes in the shopping habits of customers, who are cutting their cloth to cope with falling incomes and pessimism about their own futures.

“We’re noticing a real change in consumer behaviour. A third of our customers get to the end of the money, they have nothing left over,” he says.

“Half of our customers who go into a shop check the price on every single item that they put into the basket. They look at the price and they do the mental maths of whether they are going to put it in their basket.”

Until 2010, Philips says British consumers “shopped around a budget”; now they “shop to a budget”. One customer recently sent him one of her receipts from a Morrisons shopping trip that totted up to £100 (€117) exactly.

Tougher times are changing everything in supermarket retailing. Customers now spend 20 per cent longer shopping as they check prices; they are buying ingredients for more home cooking, and shopping patterns differ widely in each week of the month.

In the past, the first week in the month after pay day “rose like this”, says Philips, gently raising an arm in the air. Now the curve in the first week “is like this”, he goes, raises his arm dramatically upwards.

“You’re seeing a big shop at the beginning of the month when people have money, and then towards the end of the month you are seeing it really slow down,” he says, with credit card sales declining sharply.

“So we are having to change how we promote during the month, [with] big bulk deals like soap powders and staples at the beginning of the month. Towards the end of the month there is no point putting a bulk offer of detergent because people don’t have the money.”

Gloomy economic times are nothing new, but this one is different, Philips believes.

“I suppose the difference now is that people don’t really see an end in sight. People who are tied to budgets are thinking: ‘How am I going to make ends meet.’ The middle classes see themselves only going one way.

“We had 2008, obviously, and we were in a recession [then] but people’s disposable incomes weren’t coming down,” he says, “[But] we have had since the biggest drop in a generation since then.”

Traditionally strong in fresh food, Morrisons last October launched its “M Kitchen” range of signature dishes, prepared with Michelin chefs Aldo Zilli, Atul Kochhar, Pierre Koffman and Nigel Haworth. At the same time, its entire 11,000-strong range of products is being progressively updated.

Sharing some “M Kitchen” beef bourguignon from the range, topped with a slice of Shorthorn fillet from the company’s farm, rented from Prince Charles in Dumfries in Scotland, Philips enthuses about the new range:

“That’s all for £5.99 – for two,” he notes.

Shorthorn fillet is part of a drive to put beef from traditional breeds on meat counters: “We’ve reared it. We slaughter them. It is the best beef in the UK at the moment. It is a small range, a very specialised range.”

The Scottish farm has £2 million invested in it. “We use it to work with farmers. We are saying that if we can do it there – in a very difficult area to produce food, with the highest rainfall – and make money and make it commercial, then we’ll work with other farmers to share that benefit.”

Equally, Morrisons is adapting to the UK’s ever-changing demography: “We have to be able to target our range to the communities. York, for example, is very different to Bradford. Bradford has got a high Middle Eastern, Muslim base and York doesn’t.”

Consequently, Morrisons is tailoring its shelves to local tastes: “In Kirkstall in Leeds, we are testing a whole new range. We have a strong focus on Asian greens, pak choi for instance. And we are getting Asians in there.”

Such vegetables would traditionally have been available from local greengrocers, but, Philips says, “because we have a very efficient supply chain, as do the other retailers, we are able to sell it at a much more competitive price”.

Back in 2004, before he arrived, Morrisons, with 100 stores, took over Safeways, with 400. It was a problematic marriage that led to a series of profit warnings and culminated in the departure from Morrisons of its founder. He was replaced by Marc Bolland, who later went on to lead Marks Spencer.

Philips had previously been chief executive for the Galen Weston-owned Brown Thomas for two years before moving to Canada as chief operating officer of Weston’s Loblaws operation, the largest food retailer in Canada.

Acknowledging that the integration of the businesses was difficult, Philips, however, insists: “As it turned out, it was a fantastic acquisition, a great acquisition, because we got this footprint now that we didn’t have.”

Historically, Morrisons has been a north of England company, though it has spread south. Still, there is much room to grow: “There are seven million households that don’t have a Morrisons in their trade area. There’s a lot of white space for us. We have a 12 per cent market share, one that has grown every month this year. So there is a big opportunity there to take the offer and predominantly, but not exclusively, that is in the south [of England],” says Philips.

He is coy about Morrisons’ interest in frozen-food retailer, Iceland. Morrisons is one of six firms, including Asda-owner Walmart, and a clutch of private-equity firms, to show interest in the controlling stake in Iceland, which is being sold off by two Icelandic banks mauled in the credit crisis.

Market analysts dislike intensely the idea of Morrisons getting involved, with one analyst, Bernstein Research, saying even talk of Morrisons’ interest in Iceland, with its 750 stores, will “be taken negatively by investors”.

Philips gives nothing away: “It goes back to what I said earlier. We have got seven million households that don’t have easy access to a Morrisons. We have lots of opportunities to grow. We are a prudent organisation and we will grow at the appropriate level.

“I am not going to comment on a specific competitor. We have lots of opportunities to grow. We will obviously look at everything going on in the market because it impacts on us,” he says, fending off further questions by saying, “You want to grow at a measured rate.” Currently, Philips is leading efforts to drive out £320 million of costs from Morrisons, partly by overhauling the company’s operating system, some of which dates back to the 1970s and has to be repaired with parts bought on eBay.

His main competitors have already banked such savings, Philips acknowledges, “[but] because we were so focused on the Safeways integration we didn’t have time to go after [them].”

Morrisons will not, however, follow its competitors’ drive into store sales of TVs, bedding, etc.

“People won’t buy non-food in bricks and mortar. That model is over in stores that are big large sheds of 80,000sq ft – 90,000sq ft, I really feel that.”

That business will increasingly move online, he argues.

“Morrisons has steered out of that and I think we have been smart to keep out of that. Our focus will be on food. We’ll sell non-food, but we will sell it online.”

The jury is still out on online food sales, but Philips will take convincing. “When you start distributing to people’s houses and charging them zero, which is in many cases what you see out there today, we don’t understand how people can make money.”

Supermarkets work because customers do part of the work, he says, driving to the stores, filling their baskets and taking the goods home. Nevertheless, Morrisons has taken a 10 per cent stake in New York-based online grocer, Food Direct. “We have a team of executives in New York learning how that business, which is the best in the world, is run.

“We were fortunate to be able to take a share of that. So we will take the learning from that to see if we can do a profitable business here.”

Since he moved back to Europe from Canada last year, Philips has returned to Ireland regularly, thanks to “Mr O’Leary’s very efficient service between Dublin and Leeds Bradford”.

“It is fantastic to be here in the UK. I have got a fantastic job, this is an incredible company and I am really enjoying working here,” he says.

In a tribute to his father – the founder of Ballyfree Farms who died around the time of Philips taking up his new role – a friend wrote that: “Tim Philips had a threefold philosophy for life: one, if you are going to do anything, do it very well; two, never think you can’t do something because it hasn’t been done before; and three, the faster you can do it the better!”

The philosophy, it might be said, has passed to a new generation.

ON THE RECORD

Name: Dalton Philips

Age:  43

Position: Chief executive Morrisons supermarket group

Family: Married to Penny with two children, aged 11 and eight.

Interests: Free time spent with the family

Something you would expect: He holds an MBA from Harvard Business School.

Something you might not expect:He is interested in marathon running and completed the Boston Marathon this year.