Morrisons is supermarket loser as debts crisis looms

Bradford-based chain faces a battle to get shoppers back on board, write Hannah Boland and Ben Marlow

‘I mean, why are they in this mess? Morrisons did really well coming out of the pandemic’

‘They will have a hard time to steady the ship and turn it in any direction to lead them to profits’

In his final chairman’s report before retiring in 2008, the late Ken Morrison made a point of highlighting his supermarket’s falling debts as a particular point of pride.

Net debt at the Bradford-based chain had fallen by more than £200m in a year to £543m, he pointed out, while profits had jumped to £612m. The famously parsimonious Yorkshireman had run the chain on such a tight financial leash that he did not bother redecorating its headquarters for more than three decades.

As his 55 years in charge was coming to an end, the outgoing chairman declared Morrisons would “continue to prosper as long as it remains true to its founding principles”. Yet it is sitting on a net debt pile totalling £8.6bn, new filings show – a sixteen-fold increase compared with when Morrison left.

The latest accounts for Market Topco – Morrisons’ parent company – show its interest costs stood at £422m for its latest financial year, up 45pc on the prior period. Meanwhile, debt-financing costs have ballooned from £593m to £735m.

The debt-financing bill has pushed Morrisons deeper into the red. The company posted an overall loss of £1bn last year and has been loss-making since its takeover by the private equity firm CD&R in October 2021.

Morrisons claims it only started paying interest midway through last year, so the 2023 figure is bound to be higher. It points out that earnings before interest, tax and various accounting costs show it made a profit of £970m. Yet the debt situation is one staff are sorely aware of. Executives are said to have stressed in meetings that Morrisons has not been trading strongly enough to cover its interest payments. City watchers share this concern. Fitch downgraded Morrisons’ credit rating in December 2022 by one notch to B+, before demoting it again in November last year. The ratings agency blamed higher-than-expected leverage and adjusted debt, and lower earnings and free cash flow generation.

Morrisons was also hit with a downgrade from Moody’s in February last year on the back of lower-thanexpected annual profits. It was the third time it had downgraded the chain since CD&R’S takeover in 2021. The outlook for Morrisons’ ability to repay its debts was moved to negative and its existing junk rating knocked down one notch, indicating higher risk.

Bill Grimsey, the retail veteran who ran Iceland between 2001 and 2005, says debt is the number one problem at Morrisons. “In the worst-case scenario, they could go into administration,” he says. Tackling the debt has become a top priority. Morrisons sold its petrol stations in a £1.8bn deal in January and most of the proceeds will be used to pay down borrowings. Yet it also faces challenges on the trading front, too. Morrisons’ market share has fallen from 10.3pc to 8.8pc since early 2021. It lost its position as Britain’s fourthlargest supermarket to Aldi in 2022 and has not been able to win it back.

The problems are interlinked. Speaking earlier this year, Joanna Goff, the chief financial officer, said: “I don’t actually see debt reduction and investment as two separate parts. Actually reducing the level of debt will reduce our interest costs and then in turn, obviously, we’ll have more that we can use in investing in the stores.”

Rami Baitiéh, a well-regarded former executive at the French chain Carrefour, has been brought in to help drive a turnaround. He became Morrisons’ new chief executive in November. His assessment of its position was stark: “Since the pandemic, Morrisons has not been on peak form. We must not be satisfied with our recent performance.”

Reports suggest Baitiéh, a former colonel of the French air force, has an intense management style. Since he joined, Morrisons has seen a flurry of directors exit the company. This is, in some people’s view, no bad thing. “He’s right to ruffle some feathers,” says one former director. “I mean, Christ, why are they in this mess? Morrisons did really well coming out of Covid. But the leadership team was complacent.”

Morrisons was the fourth-cheapest supermarket in May 2021, according to Which? figures. A year later, it had become the second-most expensive. Although Morrisons has been working to bring prices down, it is a battle to get shoppers back on board. “Asda and Morrisons have been hit more by the discounters than say the likes of Tesco and Sainsbury’s,” says Jonathan De Mello, founder of JDM Retail. “That’s because they’re not cheaper than the discounters and the quality isn’t as good as Tesco and Sainsbury’s.”

Certain stores, meanwhile, are in need of investment, particularly those away from its heartland in the north of England. Unlike many rivals, Morrisons manufactures more of what it sells, owning bakeries, fisheries and flower growers. This can be a burden during downturns as higher overheads remain. But writing on social media this month after a meeting with Franck Petitgas, Rishi Sunak’s investment tsar, Baitiéh flagged Morrisons’ “British food production centres up and down the country” as a key strength.

Ultimately, De Mello says the high level of debt and interest payments make Morrisons’ fight to win back more market share difficult. “Rami is going to have a very hard time to steady the ship and turn it in any direction which is going to actually lead them to profits,” he says. Costcutting and more asset sales may be the only way. The Telegraph reported last month that Morrisons had hired advisers to explore the potential sale of Rathbones, its bakery business. Its headcount shrank by more than 8,800 jobs in the year to October 2023, accounts show. Grimsey is rueful. He believes Ken Morrison, who died aged 85 in 2017, would not approve of the state of affairs at the supermarket he built into a giant. “If he was still alive, he’d be spitting blood.”

Morrisons maintains that its underlying performance is strong. A spokesman said: “The statutory profitability was affected by a number of non-cash items, including depreciation and amortisation, as well as exceptionals.”