The Bradford-based supermarket now produces a fifth of its own products, operating facilities including the former Rathbones bakery, purchased in 2005, four abattoirs, and a fish factory in Grimsby, which it acquired in March.
Morrisons' chief executive Dalton Philips said in March this year that the supermarket was on track to become the UK’s largest manufacturer of fresh food by 2015, overtaking Vion.
But Clive Black from Shore Capital said: “In good times vertical integration gives you exclusivity and can be used to strategic and tactical advantage, as you can choose to promote a category when no-one else is. However, in an adverse climate it is a double negative.”
While Morrisons' supermarket competitors can demand that suppliers become more efficient or reduce prices, there is no quick fix for Morrisons. It can only look at improving its own efficiency, he said.
Tough it out
“The consumer is in a difficult space at the moment. Morrisons has got to tough it out, it is between a rock and a hard place,” he added.
Julian Wild, food group director of legal firm Rollits, told Foodmanufacture.com: “The Morrisons strategy of vertical integration is pretty hard to understand. It is not employed by any of the other major retailers, there is already over-capacity in food manufacturing, why would a major retailer want to be involved?”
He said: “I thought when Dalton Philips became chief executive that he would move away from manufacturing, but in fact it has been significantly added to.”
But Dave McCarthy of Investec added: “Morrisons’ management clearly thinks vertical integration is the thing to do, it allows Morrisons to be differentiated and react quicker, and it is not paying someone else a margin.”
Shore Capital had today downgraded its recommendation on Morrisons shares from hold to sell, saying that its trading performance and loss of market share was causing it growing concerns.
Negative volumes
It said: “For any retailer negative volumes are a cause for concern because it can compress margins through operational gearing. In Morrisons case, however, such negative operational gearing pressures may be even more compounded by the vertical integration of the business with 20%+ of volumes going through its own plants. Such pressures are expected to offset underlying self help within the business in our view.”
Shore Capital said in its note: “Our downgrades come fast on the heels of notable concerns raised by former chairman of Morrisons, Sir Kenneth Morrison, at the Group’s AGM (June 15). When Sir Kenneth speaks, we still most certainly listen.”
Sir Ken accused the management of Morrisons of neglecting the core business, last week. He said: “Our record at the moment is one of price inflation, lower volumes and diminished levels of availability and a falling market share in the grocery trade ... I believe that we are witnessing the creation of a new Safeway with all the inherent problems.”
Wild warned that the supermarket's capability of finding suitable sites to expand into in the south was the key challenge for Morrisons. If rumours that it was looking at buying the Costcutter chain were true, this would be a welcome development allowing it to increase its convenience store operation, he said.