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Advising Warren Buffet To Invest in WM Morrison

Morrisons is the 4th largest supermarket in the UK with over 10% market share. It focuses on food and grocery with a vertically integrated supply chain. However, its financial performance has declined, with negative returns, high gearing, and declining earnings. While its supply chain integration provides advantages, current management decisions have reduced profits. The summary recommends Warren Buffett not invest at this time until Morrisons' new direction and performance improve.

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131 views23 pages

Advising Warren Buffet To Invest in WM Morrison

Morrisons is the 4th largest supermarket in the UK with over 10% market share. It focuses on food and grocery with a vertically integrated supply chain. However, its financial performance has declined, with negative returns, high gearing, and declining earnings. While its supply chain integration provides advantages, current management decisions have reduced profits. The summary recommends Warren Buffett not invest at this time until Morrisons' new direction and performance improve.

Uploaded by

ioanadragne
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Advising Warren

Buffet to invest in
WM Morrison

Michael Porter
An industry's profit
potential is largely
determined by the intensity
of competitive rivalry
within that industry,
(Porter, M.E., 1979)

ABOUT
WM Morrison Supermarkets Plc
WM Morrison is one of the big superstores in the UK who
has more than 10% market share.
- founded in 1899 and headquartered in Bradford,
- it is the 4th largest supermarket in the UK
- takeover Safeway in 2004.
- focus on food and grocery products (Morrisons profile,
2013).
- offer the high quality of customer service by well
trained staff to attract more customers
- HOT service has introduced to colleagues in all stores
- motivate staff work as a team and achieve goals.

Their current strategy


Driving the topline:

strengthening the brand image,


create leading range and offer high quality produce;
offer customers the best fresh food in the UK;
provide great value and experiential engage shopping
environment;
build new stores help customers easy to access.

Their current strategy


Increasing efficiency:
introduce new solution for Morrisons five manufacturing produce sites
to improve efficiency.
Increasing network efficiency by reducing costs throughout supply
chain.

Capturing growth:
create different things by leveraging its vertical integration and fresh,
value credentials to develop a really distinctive and compelling fresh
food experience,
offering customers great food at affordable prices at a location which
is convenient for them.

Market share of grocery stores


in Great Britain, November 2014

Porters Five Forces


* Threat of Entry
* Bargaining Power of Suppliers
* Bargaining Power of Buyers
* Development of Substitute
Products
* Rivalry among Competitors

Threat of Entry
Threat of new entrants is medium:
Large economies of scale
Huge buying power of the established supermarkets, which
make it actually impossible for a new player or for the
smaller convenience stores to much their low costs.
Any new entrant supposed to come in on a large scale in
order to achieve low cost level.
Capital requirement is high as entry to market involves
huge investment in distribution, service and technology.
Four big supermarkets already have big share in market
new entrants
Consumer expectations growing nowadays.
Government policy.

Bargaining Power of Suppliers


Morrisons bargaining power of suppliers is quite low.
Buys stocks from a lot of suppliers
Recently seeking to source greater volumes from fewer suppliers
in order to become more efficient:
Greater discounts that the supermarket can receive & offer
Can lead to higher dependability on the suppliers as they
become less and are supplying bigger share of the items in the
shop
Decreases the choice for the consumers of the offered goods

So, they have been able to drive costs down by forcing suppliers to
offer discounts as the result suppliers especially growers profit
margins been cut, however these cost savings to the supermarkets
have not been passed on to consumers.

Bargaining Power of Buyers


The bargaining power of the buyers is very high due to
the availability of several alternatives.
If the buyers are not satisfied, they will easily switch
options
switching costs are very low
the customers have full details about demand and
actual market prices.
products have a slight differentiation and are more
standardized,

* Development of Substitute
Products or Services
Threat of substitutes is high as against Morrison a lot of convenience
stores, forecourts supplying products to shoppers.
Existence of close substitutes makes consumers being very
sensitive on price that they will switch easily to another
supermarket or online shopping.
Morrison is the only supermarket which does not offer online
shopping yet to customers.
However, Morrison can reduce its grocery cost as the result of good
vertical integration of supply chain.
Earlier mentioned 100% beef, pork, lamb and chicken sold are
British.
Morrison owns its packing factories and bakeries it gives more
advantage over other supermarket rivals.

Rivalry among Competitors


Increased rivalry among grocery retail shops may occur when competitors
are roughly the equal size and one competitor decides to gain share over the
others (Lynch, 2006). Factors that conduct to increased rivalry: market
growth, cost structure, barriers to exit, switching cost and diversity:
this industry has high competition, big 4 have already occupied most
markets across the country, including: Tesco, Sainsburys, ASDA
(America owner Wal-Mart), Sainsburys and Morrisons.
Tesco is market leader, which has 30.7% market share, followed by
ASDA with 17.6%, Sainsburys held share at 16.6%, Morrisons at the 4th
position with 11.9% market share (The Guardian, 2012).
Tesco and ASDA have almost 50% market share due to their sizes; both
of them are international companies who have business worldwide. The
threat of rivalries is high.
They are: market growth, cost structure, barriers to exit, switching cost
and diversity

SWOT

Industry from the company


perspective
Not unique products or service but vertically integrated supply chain
that differentiates them form competitors
Morrisons is different from other supermarkets because it owns and
control its supply chain. This means that Morrisons are closer to
source by cutting out the middleman.
The advantages of this business model are:
customers get great value for money and fresh food at great prices
Morrisons can react earlier to consumer trends
bring seasonal food in-store quicker than other supermarkets.
Brand loyalty has diminished in the FMCG industry with the start of
the crisis now people are looking for the best deal and turning back
to their favorite shops
Vertically integrated with some of its suppliers
Present only in the UK

Value chain analysis(VCA)


identify potential sources of economic
How
the firms internal core competencies can be
advantage
integrated with the external competitive environment to
direct optimal resource allocation:

Financial ratios are categorized


according to the financial aspect of the
business which the ratio measures:
Liquidity ratios examine the availability of company's
cash to pay debt.
Profitability ratios measure the company's use of its
assets and control of its expenses to generate an
acceptable rate of return.
Leverage ratios examine the company's methods of
financing and measure its ability to meet financial
obligations.
Efficiency ratios measure how quickly a firm converts
non-cash assets to cash assets.
Market ratios measure investor response to owning a
company's stock and also the cost of issuing stock.

Profitability ratios

2014

2013

-0,050

0,124

Return on capital employed

-2,453

11,550

Net profit margin

-1,346

3,571

Gross profit margin

6,074

6,657

Return on shareholders funds

Because of capital investment in on-line business the return on


shareholders funds and capital employed and net profit margin are
way lower in 2014 than in 2013. Only gross profit margin is near the
value in 2013. There is a negative percentage on capital employed
which indicates inefficient and ineffective use of resources by
management.

Efficiency ratios

Average inventories turnover period

2014

2013

17,947

16,620

6,524

5,863

49,939

45,975

Sales revenue for non-current assets

1,901

1,972

Sales revenue per employee

0,141

0,140

Average settlement period for receivables


Average settlement period for payables

Efficiency ratios are a bit better because the ratio between period
for receivables and payables is better in 2014 than in 2013. Sales
revenue per employee is quite similar. Overall the best way is to
have longer period to pay your creditors and shorter period to
receive money from your debtors as we have here.

Liquidity ratios

2014

CFO/Current liabilities ratio


CFO/Operating profit

2013

25,130

47,429

-760

116,649

All of their liquidity ratios are worse in 2014 than in 2013.the


CFO/Operating loss in 2014 is huge compared to this
parameter in 2013. Additionally CFO/Current liabilities ration is
below the industry benchmark of 40% in 2014.

Gearing (solvency) ratios

Gearing ratio
Interest cover ratio

2014

2013

44,116

38,935

2,172

13,523

Solvency ratios are bad because gearing ratio is above 40. In 2014
they have only 2 times bigger profit than interests. The increase in
gearing ratio indicates increased dependability towards debt, as
comparison to 2013. The interest cover ratio has dropped
substantially from 2013 to 2014 and we all know the bigger the
number the better.

Investment ratios

Dividend payout ratio

2014

2013

127,731

43,122

4,800

4,155

Earnings per share

10,230

26,650

Price earnings

23,313

9,380

Dividend yield

The earnings per share have decreased more than 2 times for
one year.

Conclusion
Our message to Warren

Dont buy their shares, because their profits go down, their


gearing ratio increased (so they have more debt and
dependability on debt), their management board has come up
with bad decisions through the last several years (online shops),
and it doesnt offer enough confidence.
Their CEO was dismissed several months ago, but we still need
to see the new direction in which Morissons will go.

Warren, with that money buy Ubers and Lyfts stocks!

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