After impressing in his first year with his energy and ideas, Morrisons CEO Dalton Philips reportedly cut a lonely and gaunt figure at last month’s supplier conference, as pressure grows amid the Bradford retailer’s worsening trading performance.

Dalton Philips

Dalton Philips

A number of initiatives had been introduced to catapault Morrisons - the most old-fashioned of the big four retailers - into the 21st century. These were accompanied by some high-profile appointments, most notably the highly rated Richard Hodgson as his commercial director, and the appointment of strategy director Gordon Mowat (now convenience MD).

But while some initiatives have unquestionably worked - The M-Savers range was a success, M Kitchen also worked - the share price tells its own story, with £1.57bn knocked off the value of the retailer since January last year. So, what’s gone wrong? Ahead of next week’s results, here are 10 questions the City will want answers to.

And after you’ve read them, read Dalton Philips’ response to our questions.

1. Has Dalton lost touch with his core customers?

Sir Ken Morrison was famous for his lengthy visits to local Morrisons stores, where he would while away the hours observing customers. As the stores he visited were mostly in the North, when Morrisons acquired Safeway in 2004, he laid himself open to accusations that he didn’t understand the southern shopper. However, delivering 36 years of unbroken growth, can anyone really have a better understanding of who the core Morrisons shopper is? Hence the significance of Sir Ken’s comments at the AGM last summer, when he accused senior management of being ‘out of touch’. In the modern world it’s easy to get distracted by online forums and Twitter - but how much time does Dalton spend in stores every week, and how often does he attend focus groups?

2. Is the investment in the Store of the Future programme paying off?

Philips is justifiably proud of the Store of the Future concept - it looks fantastic! From Kirkstall in Leeds to Royal Tunbridge Wells and Camden town - the array of exotic veg such as okra, truffles and samphire on display is a joy to behold - block out the Morrisons signage and you could easily be convinced you were in a Whole Foods Market.

Are the new layouts attracting enough new shoppers to justify the investment or are they alienating Sir Ken’s core customers?

The point of course is you are in a Morrisons and while store managers can all tell tales of shoppers, even restaurateurs driving 50 miles to take advantage of the array of fresh produce on offer - are the new layouts attracting enough new shoppers to justify the investment or are they alienating Sir Ken’s core customers?

Morrisons has set a target of 6%-8% sales uplifts to justify the £1.6m-£2.2m investment cost of a full conversion to the new fresh format, but The Grocer understands only six of the 120 stores converted have hit this target.

Shore Capital analyst Dr Clive Black says the “fresh format is part of the problem not the solution”. And the numbers don’t stack up, he suggests. “If the fresh formats were all delivering a big uplift in sales, then it would suggest an implosion in the rest of the Morrisons estate and I don’t think that is the case. I’m not recommending they simply scrap them, they can’t go back, but you have to ask what is Plan C?”

As one Morrisons insider says: “This may work as a format in St Albans, but in the M62 corridor, it’s turning customers off. The national rollout feels like dogma.”

3. What is Morrisons doing about the discounters?

On Radio 4’s You & Yours this week, Philips once again blamed Morrisons’ woes on its limited presence in online and convenience - the two fastest growing areas within mainstream grocery. But its losses to the discounters are just as significant. Switching data seen by The Grocer shows Morrisons lost £25m sales to Aldi alone in the latest quarter [Kantar, 12w/e 17 February 2013]. It’s not alone in this regard. Indeed Tesco (£39m) and Asda (£28m) lost more. But their market share is greater. “Morrisons is losing a disproportionately far higher number of shoppers to Aldi than its larger big four rivals,” says a senior retail source. “And in its Northern heartland it is probably also losing out to Poundland, Home Bargain and Farmfoods, which are highly concentrated in this part of the country.”

In August 2011 Morrisons went as far as appointing investment bankers at Credit Suisse to run the slide rule over Iceland Foods. The general consensus was that Morrisons would convert the stores into smaller Morrisons supermarkets a la Asda’s takeover of Netto. However, The Grocer understands Morrisons was planning to run Iceland separately - as a Morrisons-owned fascia - but using Morrisons’ buying power to secure better terms. The board’s decision to pull out meant Malcolm Walker got his company back, while the discounters continue to gain market share disproportionately at Morrisons’ expense.

4. How strong is Morrisons’ management team?

A year ago Philips fumed at reporters who questioned the strength of Morrisons’ top table. At the retailer’s Q1 results in May he described such suggestions as “baloney” citing feedback from headhunters who praised Morrisons for assembling a “very fine team”, with Philips adding that it had “more stability than any other retailer”.

With Morrisons losing its finance director, commercial director, two marketing directors and two HR directors, Philips can no longer claim “stability”

He made the comments after highly respected group finance director Richard Pennycook announced he was quitting (he will leave in April, to be replaced by Trevor Strain). Since then another widely respected lieutenant, Richard Hodgson, was shown the door, and will be replaced this spring Casper Meijer, from Dutch supermarket group Albert Heijn. With Philips already considered a ‘left-field’ appointment, rivals view Meijer’s appointment as a gamble.

Certainly there are still some talented individuals around: new marketing boss Nick Collard is seen as a rising star, retail chief Mark Harrison has bags of experience having played a key role in the integration of Safeway while strategy guru Gordon Mowat hails from McKinsey, the same consultancy recently hired by Asda to guide its plans over the next few years. But with Morrisons losing its finance director, commercial director, two marketing directors and two HR directors, Philips can no longer claim “stability”.

5. How useful was FreshDirect as an acquisition?

Earlier this year Morrisons gathered its leading suppliers together in Manchester to brief them on its strategy for the coming year. Clearer core pricing and differentiated promotions were the watchwords, but suppliers were left puzzled as Morrisons ignored the elephant in the room - the internet. Morrisons will give an update on its plans next week - but anyone waiting for it to go national could be disappointed. Philips is not the only Morrisons CEO to be sceptical about online grocery. His answer has been to dabble in ecommerce, with WineCellar, Kiddicare and Lakeland Kitchenware.

But on the second anniversary of Morrisons’ £32m investment for a 10% equity stake in New York online grocer FreshDirect, there are few signs of progress. Morrisons has had a team embedded in the US for 18 months in the hope of working out how to develop a profitable online grocery business on this side of the pond. But after taking 10 years to expand from New York to a second location, FreshDirect’s expansion to Philadelphia in October, delivering from a new chilled warehouse, is still in its infancy. Anyone who thinks Morrisons will be able to simply roll this model out to the UK anytime soon is likely to be disappointed.

Indeed, FreshDirect customers were temporarily prevented from making orders over Christmas as the retailer failed to register its domain name. US grocery expert Jim Prevor believes for Morrisons to make its FreshDirect experience pay off, it would need to give its internet project the freedom it needs to succeed - effectively making it autonomous from the main supermarket business, offering exclusive ranges, promotions and pricing. “It needs to create a separate division, with the intention of driving all bricks and mortar retailers out of business - including Morrisons stores,” he says. “This is what FreshDirect set out to do. It’s very difficult for a bricks and mortar operator such as Morrisons to do this.”

6. Does the Kiddicare strategy make sense?

Morrisons made its online debut in February 2011 with a £70m swoop for online baby goods retailer Kiddicare. At the time it had a turnover of £37.5m, with 80% of sales from the internet and 20% from the retailer’s only bricks and mortar store in Peterborough. Last year it spent a further £15m to turn eight Best Buy stores into Kiddicare outlets.

At the time Philips described Kiddicare as having a scalable platform, a phrase he repeated this week on You & Yours. But having declared the hypermarket would be “a blip in the history of retail” last year, the decision to take Morrisons’ first online business further into bricks and mortar has raised more than a few eyebrows.

Retail Think Tank’s Nick Bubb believes, with Mothercare’s UK stores struggling, the addition of expensive fixed costs to the Kiddcare model is a backward step.

“Morrisons received a golden hello from Carphone Warehouse to buy them, but a couple of years down the line, it will have to live with those high rents,” he suggests. “Kiddicare was doing well without having stores. Morrisons made a song and dance about the acquisition, but it needs to concentrate on increasing online, marketing, in-store, and its core business. So Kiddicare won’t be a huge positive, and may be a slight negative, given the start-up costs and now these rents.”

Clive Black agrees: “I think the decision to move Kiddicare from online to stores is questionable. The whole Kiddicare business delivers around the same sales as one or two larger Morrisons stores. So why is it spending so much time on it? There are bigger issues it needs to deal with.”

7. Should Morrisons cosy up to Ocado?

With slow progress in New York, and no obvious synergies from the Kiddicare acquisition, the rumour mill suggests Morrisons is talking to Ocado about a merger.

One senior city source told The Grocer that although no official talks had taken place, and no bankers had been appointed, “there was far too much noise for it to be just idle speculation”.

Should Morrisons cosy up to Ocado?

Should Morrisons cosy up to Ocado?

However he poured cold water on the idea that Morrisons would make a full bid for Ocado. While Morrisons could still afford a bid around the float price of 180p a share, the numbers didn’t stack up, he claimed. “I think it’s far more likely that Morrisons would look to partner with Ocado in the manner of its contract [until 2020] with Waitrose.

However, even if Ocado chose to extricate itself early from the Waitrose contract, a partnership like this would be no more successful than a FreshDirect-style start-up, says Black. “Ocado has a centralised supply model for a decentralised customer base,” he argues. “Morrisons already has stores near its customers. What it needs to do is start using these stores for online fulfilment.”

While Ocado would benefit from better buying power, Black adds that if Morrisons were to replace Waitrose as a partner, it would cause a massive displacement of shoppers. “Somewhere between 70%-90% of Ocado shoppers would move, leaving Morrisons with two distribution centres and 10%-30% of its customers.”

8. Is there a clear plan on convenience?

Until a buying frenzy in February saw Morrisons snap up 62 stores from the administrators of Blockbuster, Jessops and HMV, Morrisons had opened just 13 stores in the 18 months since it opened its first c-store in Ilkley.

Is Morrisons doing enough in the convenience sector?

Is Morrisons doing enough in the convenience sector?

While Morrisons will now clearly exceed its own target of 70 c-stores by the end of this year, analysts believe it needs an estate of hundreds of stores to see a material benefit from this growing sector. Philips is confident he can make them pay. He told You & Yours “There are 50,000 convenience stores in the UK and the multiples only own 3,000 in total and shoppers’ needs aren’t being fully met”

But securing quality sites won’t be easy. And while its c-store offer has been widely praised, one industry source questioned what he described as the panicked nature of the recent wave of acquisitions. “Until last month what had it been doing? And how good are these sites? You can be sure others had already looked at them.”

9. Is Morrisons’ vertical integration model really an advantage?

As the ‘horsegate’ crisis enveloped the food industry in recent months, Philips has worked hard to play up the value of the Morrisons integrated supply model in giving customers greater assurance on product provenance.

And Morrisons has always argued that rivals couldn’t replicate its integrated model because, having built its manufacturing capacity over almost 40 years, it would take too long. Indeed, having recently bought the Kwok Foods fishing operations in Grimsby, it is actually ahead of the curve in cutting out the middleman, as Tesco and Asda have been doing recently.

Morrisons has always argued that rivals couldn’t replicate its integrated model because, having built its manufacturing capacity over almost 40 years, it would take too long

However, analysts continue to question the rationale. “If it’s such a good idea, why aren’t other retailers doing it? And why aren’t suppliers opening stores too, for that matter?”

“While rivals can negotiate, Morrisons is hamstrung,” adds a senior retail source. “As well as being forced to use other suppliers when running big promotions, their factories are often running at way less than optimum capacity when promotions are not running due to the significant volume decline experienced since Sir Ken’s day.”

And the manufacturing business is also a smokescreen. As the senior retail source says: “If Tesco bought its manufacturers – how much more profitable would it be? We aren’t comparing like for like.”

Around one third of Morrisons’ £947m profits last year is thought to come from its manufacturing facilities. “It’s common sense,” says the source. “It uses so much higher labour costs in-store. And it doesn’t buy as well. So, of course, it’s not as profitable as its rivals. But how much investment is there in the manufacturing side? Each year they have to decide to upgrade machinery or open stores. Every time, they choose to open stores. Sooner or later there’ll be a massive food scare as a result. And it could kill the brand.”

10. Are Ant and Dec worth the investment?

Everyone loves them, but no sooner had Ant & Dec signed on the dotted line they were front-page news for all the wrong reasons, reportedly admitting they had taken drugs. What’s more, The Grocer understands Morrisons paid top dollar to sign up the lovable Geordie pair - up to £15m.

Are Ant and Dec right for Morrisons?

Are Ant and Dec right for Morrisons?

Jim Prior, CEO of the WPP-owned The Partners agency says that figure could be dwarfed by the media spend to support the campaign. Prior is also concerned the duo will do little to promote the Morrisons proposition. “Morrisons is an interesting business, with a compelling story. But their ads have depended on personality, not proposition, and they need to build proposition,” he says.

And there’s a further problem with the current strategy, Prior adds. “There’s tension between the desire to go upmarket, drawing customers from Waitrose and Sainsbury’s, and the desire to honour their roots as a working class, champion of the people retailer. There’s a north-south divide in Morrisons’ mind that’s difficult to overcome.”

Now read Dalton Philips’ answers to our 10 questions.