LONDON (Reuters) - Britain’s No. 4 grocer Wm Morrison Supermarkets (MRW.L) has eased back on its investment drive, cautioning that high fuel prices and government austerity measures were likely to weigh on consumer spending well into next year.
“It’s going to be tough for the next six months and probably well into next year,” Chief Executive Dalton Philips told reporters on Thursday.
“A lot depends on what happens with commodity prices, particularly fuel, and what’s going to happen with the harvests,” Philips said, referring to recent increases in food prices.
The 455-store group based in Bradford, northern England, which trails domestic rivals Tesco (TSCO.L), Wal-Mart’s (WMT.N) Asda and J Sainsbury (SBRY.L) by annual sales, said it had reduced its new space target for the 2012-13 year.
Its target was cut by 200,000 square feet to 500,000 sq ft and by a further 300,000 sq ft in 2013/14 to 900,000 sq ft, saving 200 million pounds of capital expenditure.
“It’s not cost cutting, we still have a very big investment programme ... It’s about balancing our overall investments,” said Finance Director Richard Pennycook.
Both market leader Tesco and No. 3 Sainsbury have recently slowed UK expansion plans, underscoring the more cautious approach by major retail chains as Britain’s economy struggles to escape from recession and further government spending cuts loom.
Morrisons’ comments came after the company posted first-half earnings towards the top end of forecasts and said it was on track to meet full-year expectations, sending its shares up more than 3 percent to their highest in some five months.
Philips said high oil prices, high levels of unemployment and cuts in real disposable income meant consumers had less money in their pockets and confidence was low.
“Consumers continue to adapt what, how and why they buy,” he said, noting that 73 percent of consumers were checking individual prices, buying only what’s needed and reducing waste.
Customers were also becoming more keen on promotions and were switching to cheaper own-brand products.
Market leader Tesco is seeking to recover from a shock profit warning in January by aggressively increasing promotional activity.
Philips said Morrisons would generally steer clear of “blind money off” gimmicks, such as giving a five pounds voucher on a 40 pounds shop, but had recently introduced tailored vouchers for customers at the till as well as a scheme to save money on fuel.
An industry survey on Tuesday said underlying UK sales fell last month as the London Olympics failed to provide the hoped for boost to demand, denting hopes that a rebound over the summer would lift the country out of recession.
Analysts at brokerage Jefferies said the firm’s current stock market rating - which at some 9 times forecast 2013 earnings corresponds to a discount of around 10 percent to UK peers - “ignores industry-leading returns, self-help opportunities, lower leverage and higher property ownership.”
The group’s underlying pretax profit rose 1 percent on the year before to 445 million pounds in the six months to July 29, compared with forecasts in a range of 416 to 450 million and an average forecast of 434 million, according to a company poll.
Sales at stores open at least a year, excluding petrol and VAT sales tax, fell 0.9 percent - slightly better than a fall of 1.0 percent in the first quarter and compared with analysts’ average forecast of a fall of 0.8 percent.
Total sales increased 2.3 percent to 8.9 billion pounds, helped by the roll-out of Morrisons’ Fresh Format stores and popularity of its M savers own-label value brand.
Latest industry data from Kantar Worldpanel has shown Morrisons lagging the sales growth of its three big rivals as well as smaller players such as discounters Aldi and Lidl, though this is partly explained by Morrisons’ lower level of store openings.
As well as modernising its core chain, Morrisons, which unlike rivals produces much of the food it sells, is diversifying into non-food, e-commerce and convenience stores.
It said it will have up to 20 M locals by the end of the year, including making an entry into London. It will launch an online wine offer in the second half but is yet to make a decision on whether to launch a full online food offer.
The company said it would raise its interim dividend 10 percent to 3.49 pence per share.
Editing by Mark Potter and David Holmes