Sir Ken’s career is sometimes viewed as 50 years of success, until at 73 he led the 2004 Safeway acquisition followed by four difficult years until retirement. He built up a leading supermarket chain making £320m pa. Few people will, or can ever, achieve such a feat. The last four years should never lessen that achievement, but inevitably the latter attracts more interest, as it is the story of how things went wrong and why, even when led by someone as talented and experienced as Sir Ken. Whenever I met Sir Ken, he was always very polite and proper, even warm. However, he never let that Yorkshire reserve go, so you were never sure whether you were seeing what he was really thinking. He always seemed to agree with you, even when you expected to disagree. Eventually, I realised that this was how he handled situations with people he wasn’t comfortable with, ie anyone other than his close associates and subordinates. He would listen carefully and politely to what people said, nodding and smiling, but saying very little. You would think that he was agreeing, but in fact quite often you would hear later that he completely disagreed. He didn’t like to be rude or disagree to your face.
He despised consultants, analysts, private equity and non-executive directors in equal measure. He would have done everything in his power to stop his business being taken over by anyone, let alone someone who isn’t a retailer that he respected. No-one should be taking his name to justify a take-private by financial interests.
Sir Ken knew every one of his 100 store managers, how his business ran and, above all, what his customers wanted. When you met him, you knew you were in the presence of a retail giant. So why did it all go so wrong? Why did the £600m combined profits of Safeway and Morrisons, not to mention another £300 odd of synergies, dissolve into a £300m loss two years later? Although, note that, by the time Sir Ken retired in 2008, profit had recovered to over £600m, which is incidentally three times last year’s profit.
The Morrison success story was built on a simple, unchanging concept
We all know that simple businesses have the best chance of success. Morrisons was a chain of near-identical stores built largely in downmarket demographic areas in the midlands and northern England. Sir Ken loved simplicity and wanted all stores to be very similar to adhere to that principle. Morrisons offered great ‘everyday value’ with low base prices and around 1,000 promotions, largely multi-buys, with many service counters offering variety and a ‘good honest quality’ feel. Little went to waste, as food near its sell by date would be used in the customer and staff restaurants or recycled in a service counter (eg prime meat as mince).
Sir Ken didn’t believe in complex systems. He told me once that he designed their ordering system one day in a store canteen. He described what he meant. I said but that’s just a stock & order card. Yes, he agreed, and that’s all the system is. But how does this do forward ordering, I asked. Ah, he replied, we are just trialling a system now. This was in 2003, some 10 years after the other majors, including Safeway, had automated re-ordering.
But Sir Ken dreamt of growing faster
The Safeway takeover started when Safeway approached Sir Ken. Safeway had struggled as No4 in the UK grocery market, and had tried a number of strategies without any lasting success. Eventually the board concluded that scale was the major issue. A couple of attempts to merge with Asda failed, and it was considered highly unlikely that the competition authorities would allow such a merger of No3 and No4 anyway. That left Morrisons. Sir Ken was initially cautious, not wanting to threaten what he had created so far, and took many months to agree to explore the idea. His desire to grow eventually won him over.
Simplicity has its own challenges
Morrisons was a simple business run in an efficient uncomplicated way. Reordering was manual. Ranges were near identical in all stores, each with very similar layouts. Sir Ken made almost all the decisions in a Thursday morning weekly meeting in his office. He didn’t need complex processes. He claimed that new store development decisions were made by counting chimney pots, ie driving round the neighbourhood for a while, at a time when the other chains were using sophisticated geographical databases. He spent a lot of time visiting stores and fixing problems there and then.
Sir Ken didn’t believe in sophisticated management. He had confidence in his own judgement on decisions. He didn’t need strong management around him. He needed people who would implement his decisions. As a result, his colleagues on the board were not the strongest, and there was very little middle management. This made for a simple lean structure, but also contained the seeds of future problems. It was not a structure that could cope easily with complexity or a heterogeneous store portfolio and customer base.
Safeway was a complex business
Morrisons acquired a difficult situation when it bought Safeway;
- Safeway was a much bigger business than Morrisons, with 500 stores and a turnover of nearly £9bn, against 120 stores and less than half the turnover.
- Safeway was a much more heterogeneous business. Almost all Morrisons stores were bigger than 2,400 sq m, barely the average size of the Safeway stores. Safeway was a multi-format business, with five formats (hypermarkets, superstores, supermarkets, convenience stores and BP petrol stations), where Morrisons had one.
- Safeway had a very diverse customer base with slightly upmarket demographics, across all UK regions including Scotland, whereas Morrisons had a more homogeneous, downmarket customer base principally in the midlands and northern England.
- Safeway had built itself complex logistics and IT systems, while Morrisons had experience only of relatively simple IT and two regional distribution depots.
- All Safeway formats were profitable, so selling off small stores, as Morrisons did, wouldn’t improve profitability, even if it reduced complexity.
This complexity was one reason why Safeway had struggled over the previous decade. Itself the product of a takeover, by the Argyll Group in 1988 of the UK arm of US company Safeway Inc (ironically a private equity takeover of the US parent meant that it had to sell the UK arm to raise cash). Initially this new group performed very well, until the recession in 1993. The synergies of the merger hid for a while the longer term problems of lack of scale and complexity/heterogeneity of the resulting business. This became evident in the mid 1990s, when not even the advice of McKinsey, which ironically also played a lead role in the contemporaneous turn around of Asda, seemed able to lift Safeway’s stagnating profit. Later a new CEO, the glamorous Argentinian Carlos Criado-Perez, similarly struggled.
Ciado-Perez added significant extra complexity himself. He saw that Safeway couldn’t offer lower prices than Tesco or Asda and complained that Tesco immediately matched any significant Safeway promotion. To counter this, he devised a rolling series of deep promotions across different sets of geographically disparate stores. Whilst very complex, these promotions proved impossible for any competitor to match effectively. In the end, however this extra complexity proved too much for the incoming Morrisons team.
Safeway customers didn’t shop at Morrisons
Safeway, in the run up to the takeover, did some research that showed that in areas where there were both Safeway and Morrisons stores, Safeway customers tended to avoid Morrisons. The Safeway customers would shop at Tesco or Sainsbury, but rarely Morrisons. Sir Ken dismissed this evidence, but it would come back to haunt him.
Almost all grocery customers have a choice of where to shop. Indeed, maintaining this was at the heart of the later competition inquiry into and remedies for the takeover. Safeway attracted customers who liked strong, largely price-led (ie not multi-buy) promotions. They appreciated a wide range with upmarket lines tailored to their demographics. These were the key factors why Safeway customers were choosing to go there, rather than to Morrisons and, to a lesser extent, Sainsbury and Tesco.
It was therefore quite a brave decision by the incoming Morrisons management to stop the price promotions, replacing them largely with multibuys. They then reduced range, especially on fresh lines, and put in a more generic downmarket product range. If they wanted upmarket ranges, they now had to go to Tesco, Sainsbury and Waitrose. And they did. Post takeover Safeway suffered a dramatic loss of customers, who fed revivals at all its rivals. This represented a victory for simplicity and less fresh food wastage, but it was pyrrhic, as customer numbers dwindled.
Sir Ken wanted to purge Safeway
There was to be no merger of management. Initially Morrisons agreed to ‘best man for the job’, but the reality was different. Safeway’s head office, west of London, was closed progressively and employees could either take redundancy or apply for a job in Morrisons head office in Bradford. Few took the latter, fearing for their long-term future. As a result, Morrison lost the people who knew how to manage the complex Safeway business.
Morrison simplified the supply chain by disposing of the automated replenishment system, explaining to store managers that they would have to go back to writing their own forecasts again. The core multimillion-pound ERP system that Safeway had just finished installing was cancelled. Morrisons rejected Safeway’s promotional strategy. They disliked, with some justice, that supplier funding for the promotions tended to come in as lump sum monies at the year-end, with other volume and activity-related rebates. Controlling such an accrual was a very tricky task for the finance team, but Morrisons management went further and said that they didn’t believe the (externally audited) sums were real and that they didn’t approve of collecting them. They were men and women of their word. They stopped trying to collect these monies and then fired the finance team and the buyers, who knew where the money was.
This was not an error of strategy, because reducing the promotional weight was very sensible, It was however a failure of execution by the people Sir Ken had charged with managing the integration.
Simplicity plus complexity results in more complexity
Sir Ken had built a brilliant model. His was a simple, homogeneous business with a thin management structure under his clear management. However, this also limited its growth. Morrisons didn’t want to develop new stores that were significantly smaller or larger or in different demographics. There was a limit to how many stores Morrisons could run with this model, not least as Sir Ken couldn’t know and visit each one regularly. There was a limit to its scaleability. Safeway had been complex partly because it struggled with a variegated store portfolio. It wasn’t possible to simplify the combined business just by imposing the Morrison model. In so far as this happened, the result was then not what the Safeway necessarily customer wanted.
The Safeway acquisition didn’t cause these problems for Sir Ken, but it revealed them in spectacular fashion. Trying to impose Morrison simplicity on Safeway customers and processes was like trying to herd cats into one of Ken’s cowsheds.
Maybe Sir Ken had just taken on too much
We can analyse the Safeway acquisition with 20:20 hindsight, but maybe this was a business that was too difficult for anyone to manage successfully. Two successive CEO’s at Safeway struggled and Morrisons then laboured. Grocery retailing is a tough business and scale takes a toll on the smaller players. This is a point that financial buyers might be well advised to ponder.
Sir Ken – a retail giant of his time
You have to admire the entrepreneurial and retail genius of Sir Ken Morrison. Maybe in another time, he would have retired with Morrison as a growing successful fifth player. Perhaps he cursed the day that he started to pursue greater growth. However no one is perfect and Sir Ken is not, and won’t be, the last entrepreneur to be seduced by a tempting corporate acquisition.
The best tribute to him is to learn from the experience:
- To appreciate the value of strong independently minded executives and a few challenging non-executives;
- To move with the times, embracing change and new methods. The development of IT and the digital economy simply cannot be ignored;
- To balance the huge benefits of simplicity with the necessary complexity of the business you actually have, rather than the one you wished you had; and
- To evaluate acquisitions, without understating the risks of upsetting customers, losing key staff, setting the right inclusive culture and understanding the different business models.
It’s not difficult to imagine what Sir Ken would have thought of the current bids for his beloved company. However, Sir Ken is long gone, but let’s hope the lessons from Sir Ken will be noted by whoever takes his seat at the board table in the future.
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There is more on how to evaluate corporate acquisitions, the importance of integration, and indeed how businesses and boards take decisions in my new book ‘Behind Closed Doors. The boardroom’ available from all leading bookstores, including Waterstones and Amazon.