Mike Dennis Comments: Morrisons’ demotion may not all be doom and gloom

December 3, 2015, The Yorkshire Post

The news that Morrisons is to be booted out of the London Stock Exchange’s elite FTSE 100 index will come as no surprise following a sharp drop in its share price amid falling sales, profits and market share.

The UK’s fourth biggest grocer will be replaced by credit lender Provident Financial, which is also based in Bradford.

Morrisons’ shares have fallen by more than a quarter since they hit a high of 208p in March shortly after the appointment of new chief executive David Potts. They closed on Wednesday at 151p, down 0.2 per cent, as the reshuffle was widely expected.

The grocer narrowly missed relegation in the June and September reviews and the demotion ends 14 years in the top flight.

So what impact will the relegation have on Morrisons?

It is thought that demotion could hit the grocer’s share price as tracker investment funds buy heavily into the FTSE 100 index.

Analyst Mike Dennis at Cantor Fitzgerald estimates that around 47 million shares – worth £70m – will be traded once Morrisons leaves the FTSE 100 on December 21 as tracker funds pull out of the three demoted firms – Morrisons, security group G4S and engineering group Meggitt.

However, some believe it will make little difference. Yes tracker funds will sell their shares, but other investors could buy them on the hope that new chief executive David Potts can live up to his reputation.

From a status point of view Morrisons would obviously prefer to be in the FTSE 100 rather than the FTSE 250, but if Mr Potts can get the share price back to 180p/190p it could well re-enter the top flight.

Mr Potts has done a huge amount since he joined in March. He has taken the axe to managerial roles, hired an extra 5,000 shop staff and introduced six new goals.

The first is to become more competitive by cutting the price of everyday items. After investing​ ​£​181​m in its first half, mostly​ on price cuts, ​Mr ​Potts said the full-year investment w​ill​ top ​£​300​m.

The second is to improve customer service following complaints that store staff seem disengaged, which is seen as a reflection of previous management decisions.

The third is the introduction of different merchandise to suit different areas.

Mr Potts said that wealthy areas such as Brough will have different wwwuce to stores in Leeds that serve the student population.

The fourth is the introduction of more popular services such as cafes, dry cleaners and pharmacies, which drive footfall.

The fifth is a return to Sir Ken Morrison’s vision of a simple business that sells quality fresh food at low prices.

The final aim is to return the core supermarket estate to growth and the group will upgrade its entire store estate by the end of 2018.

Under former management some stores were given expensive upgrades including the controversial vegetable misting machines, but 200 stores have not been touched over the past five years.

Mr Potts must now deliver on his goals if Morrisons is to return to the top flight.

A major question for investors at this time of year is will there be a “Santa Rally”?

The UK stock market has risen in December 86 per cent of the time, but ​Laith Khalaf, senior analyst at Hargreaves Lansdown, said a rally will depend on whether the market has been bad or good.

“Stock market history suggests Santa really does deliver gifts to investors in December with surprising regularity,” said Mr Khalaf.

“Looking back over the last 30 years, December has been the best month for UK shares, which have risen almost nine times out of every ten years.

“In years like 2015 when the stock market has already risen, there is a higher chance December will follow suit and post a positive return.​”

He said that no-one can explain this st​range seasonal phenomenon, so don’t be too surprised if it turns out to be one of those years when Santa stays in his grotto.​​