Investors were encouraged by last week's sales from Morrisons and the share price is now recovering.The transaction to acquire Safeway is finally paying dividends. The Morrisons business model is strong and unique. Applying it to the ex-Safeway conversion programme will drive sales and profits.
The deal was based on three fundamentals: Ex-Safeway stores generating similar sales and profit to Morrisons. Margin benefits from vertical integration in key fresh and processed departments would extrapolate into ex-Safeways. And vast scale and efficiency benefits would flow straight to the bottom line.
The basis for generating these benefits are in place, with the completion of the conversion. It has been executed well - no mean achievement given its scale. Thousands of my ex-colleagues deserve great credit for coming through the challenges of the past two years - they were never short of commitment and graft. Morrisons can now derive the benefits from focusing on one fascia without distraction.
Sales momentum should continue for the next 18 months as the bulk of ex-Safeway stores go back to pre-merger levels, then begin to match the original Morrisons sales ratios.Those sales will come from more customers and larger baskets, generating solid underlying profits. There is a relatively benign price environment and no reason why Morrisons will not grow sales in the short term, with strong store profit growth, significant scale benefits and scope for significant profit growth in the next two years.
The real question is can Morrisons grow after the immediate sales benefits have been achieved? It will need effective strategies on range development and store formats.
Customer expectations on organic, healthy eating and premium products have evolved. Morrisons is a national mainstream superstore and needs to offer ranges that reflect broader appeal. Non food is a major opportunity for growth.
The sole focus on a superstore format could prove a barrier as sites become more and more difficult to find. The selling of all small Safeway stores was lucrative in cash terms but the day may come when it is looking for this type of fresh food-oriented supermarket.
So while the news suggests there is more than a light at the end of the tunnel, a lot of issues remain if the opportunities in front of Morrisons are to be fully realised.
Former Safeway director, now development director at SB Capital Europe