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Morrisons may shun retail mega merger kingmaker role to continue online expansion

Morrisons, which has online delivery deals in place with Amazon and Ocado, will likely invest further in e-commerce with the high street in decline
Morrison's trolleys
Morrisons has delivered sales growth for 11 consecutive quarters despite fierce competition in the UK retail market

Wm Morrison Supermarkets PLC (LON:MRW) is tipped to be the kingmaker in the £14bn merger of J Sainsburys PLC (LON:SBRY) and Asda if the retailers are forced to sell stores to get the deal done but Morrisons could spoil the party if it focuses on growing its e-commerce offering rather than its store portfolio.

Morrisons on Thursday reported strong growth in first-half profits and sales, boosted by the warm weather, England’s performance in the football World Cup and the Royal Wedding. However, some analysts are concerned that this performance was a one-off and that the retailer will need to come up with even more innovative deals and strategies to compete with rivals such as Tesco PLC (LON:TSCO) and Sainsburys.

READ: Morrisons enjoys exceptional Q2 but shares fall on hefty one-offs and profit-taking

Press reports suggest that the Competition and Markets Authority would like to see Sainsburys and Asda shed up to 300 stores before they give the deal the green light. If the merger goes through, Sainsbury's and Asda will have more than 30% of the market.

Since CEO David Potts joined the supermarket group three years ago, Morrisons has moved into wholesale via a supply deal with convenience and newsagent chain McColl’s, which it said was going well. It has also struck a deal with e-commerce giant Amazon (NASDAQ:AMZN) to deliver groceries as a part of the Amazon Prime service and extended its five-year-old agreement with Ocado (LON:OCDO), first struck by Dalton Phillips in 2014 and extended by Potts in 2017.

“The question now is where can Morrisons go from here? There remains some intense pressure from discounters, whilst Tesco has lately announced its own discount chain aimed at countering the German upstarts. Further pressure on margins seems inevitable. Finding new growth avenues like the Amazon tie-up and wholesale business are important,” Russ Mould, investment director at AJ Bell said in a note to clients.

Despite Potts’ impressive turnaround which has seen Morrisons’ sales rise for the past 11 quarters, Morrisons is still at risk of finding itself in the squeezed middle of the grocery business, with the discounters Aldi and Lidl attacking it from one side, and Sainsburys, Tesco and Waitrose from the other. This is before Amazon announces its plans for recently acquired Whole Foods.

While the merger of Sainsburys and Asda could give Morrisons the chance to expand into London and the South East through store disposals, some analysts feel the retailer is more like to invest further in its online offering, given it has grown its online delivery service to cover more than three-quarters of UK homes. This thesis is also backed up by the fact that Morrisons has put the breaks on plans to expand its convenience store portfolio in recent years.

READ: Wm Morrison Supermarkets facing equal pay claims worth over £1bn, according to law firm Leigh Day

“The rise of e-commerce is unstoppable and the high street is in decline, which is part of the reason Morrisons has closed stores in recent years and halted plans to expand the number of convenience shops,” analysts at CMC Markets said in a note to clients.

Shares in Morrisons were 1.4% down at 262.15p in early afternoon trade. However, it was not the only retail stock on the retreat following John Lewis' first-half results, in which it posted a near 99% slump and said it expected full-year profit to be "substantially lower" than last year.

“The market reaction indicates that investors don’t really know how to read these results as the World Cup has distorted the underlying picture,” analysts at Markets.com said, adding that many investors see today’s results as a “one-off” performance.

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