Trouble in store if Ken can't make up with City

SIR Ken Morrison stepped off the podium at his annual general meeting in Bradford two weeks ago, having caved in to pressure from shareholders to loosen his grip on the struggling supermarket group.

It was changed days for Morrison, who earned his knighthood for consistently leaving the City with a smile on its face. But with an angry mob calling for his head and 20% of Morrisons' investors refusing to endorse his re-election to the board it was a decision that had to be made.

By the time he got back to his desk at the company's Bradford headquarters, Morrison realised his problems were only just beginning. His phone was ringing off the hook. Leaving aside the long list of shareholders that were demanding to talk to him, there was a string of messages left by faceless officials from the Financial Services Authority.

Just what exactly did Morrison mean when he told the meeting that he was "not in a position to provide reliable guidance on the level of profitability for the year as a whole", the regulator asked? When would he be in a position to do so? How was it possible for a FTSE-100 company to have no idea how much money it was likely to make?

Over the following days the calls from the FSA kept coming - if not to the offices of the company itself, then to KPMG, the accountants drafted in to make sense of the Morrisons' books that were ravaged by the disastrous acquisition of Safeway. The regulator's telephone complaints were followed up in writing.

Eventually the pressure led to last Wednesday's "clarification" statement from the company, which warned that profits would fall somewhere between £50m and £150m - a vague range of projections which seemed to have been plucked from thin air. Although it was Morrisons' fifth profit warning of the past 12 months, the City had still been pencilling in profits of £225m to £275m for the year to end January. It was a heavy blow.

To make matters worse, the news came just 24 hours after it emerged that Morrison's niece Susan Pritchard had sold £2m worth of shares, the second time she had sold ahead of a profits warning. It subsequently emerged that even Morrison's wife now shops at her local Sainsbury.

For Morrison and his chief executive Bob Stott, any pressure that was relieved by the AGM vote is back with a vengeance. The need to get new blood in the boardroom is becoming ever more pressing, although there doesn't appear to be a long list of potential candidates. And with the promise of a further update on the company's finances in six weeks' time, the clock is ticking.

"These issues are never handled via a vote at an AGM," says Seymour Pierce retail analyst Richard Ratner. "Of course, Ken's under pressure. I can't imagine any of his shareholders are happy with him and all eyes are now on the next statement at the end of July. It's not just Ken, of course - it's Ken and his cronies. You can't get rid of them all at once, and that's the problem."

Morrison's rise and fall is fast becoming the blueprint for retail tragedy, with his acquisition of Safeway now the prime example of what not to do in business. Like most great tragic figures, Morrison's demise seems largely his own doing.

The young Ken Morrison took over the running of the family grocery business from his father William in the early 1950s, after finishing his national service. At that time it was just a few market stalls and a handful of shops. Once Ken took over, he began a 37-year stretch of uninterrupted profit growth.

He opened his first supermarket in 1961 and brought the company to the stock market in 1967. The belligerent Yorkshireman never swayed with retailing fashions, sticking to his no-nonsense principals of low prices and value for money. He kept growing the company organically, making just one acquisition - his swoop in 1978 for Whelan's, the Wigan-based supermarket chain owned by former Blackburn Rovers footballer Dave Whelan, who went on to create the JJB Sports empire.

By the time Morrison received his knighthood for services to food retailing in 2000, pundits were queuing up to lavish praise on Bradford's finest son. Even though he did his best to avoid trips to London, the investment community loved his ability to turn in consistent profits. Many of his investors hadn't even seen one of his stores, but the sales performance was consistent so they loved them nonetheless.

Morrison refused to bring non-executive directors to the board and ignored the recommendations of the Higgs report, which called for him to split his role as chairman and chief executive. But none of that mattered.

When Morrison announced his plans to buy Safeway in January 2003, it caught the City off guard. Everyone had been waiting for Asda to swoop on the struggling chain. The agreed deal received a cautious welcome, but counterbids emerged almost instantly, triggering a four-way bidding war. After one of the most arduous competition enquiries in British corporate history, Morrison emerged victorious 14 months later - on the condition that he sold off 52 of the stores he was about to acquire, including many in Scotland.

On the day he completed the £3bn deal he walked into the Safeway headquarters in west London and reminded staff that this was a takeover not a merger and things would be done his way. Some of the Safeway employees were told they could apply for jobs at Morrison HQ in Bradford, others were immediately laid off. Among those who remained, the mood instantly turned sour.

Jokes from the shop floor about Safeway employees being forced to trade their French cheese selections for Morrisons' famous pie counters began to infiltrate into the market as a tongue-in-cheek reference to the culture clash that was developing within the organisation. Safeway had been big in the south of England and in Scotland, Morrisons was known only in the north of England.

By last summer, four months after the deal was completed, Morrisons was forced to issue the first profits warning in its history. Safeway had been neglected while the takeover battle was running, jacking up prices to cover a loss of customers. Stock problems were appearing and questions over Safeway's accounting methods began to rear their head.

The months rolled on and profit warnings became a regular feature. The accounting issues kept getting worse, eventually leading to the announcement that Morrison's finance director Martin Ackroyd was being ousted. Although the City had always admired Morrison's ability to run a tight ship, it now seemed that by clearing out Safeway as quickly as he did he left himself a bit thin on the deck.

Since the Safeway deal was completed, Morrisons' shares have dived about 40%.

Although Morrison was clocking up sales growth of 20% in the Safeway stores it converted to its own livery, the stores it sold to Tesco had doubled their sales. Other outlets sold to Somerfield, Waitrose, Asda and Sainsbury have also been showing strong growth. Costs in converting the stores have jumped from the original estimate of £1m each to £1.5m each.

Last week's estimate that profits could fall as low as £50m doesn't even take account of these additional exceptional costs - the bulk of which are falling in the current financial year. At the bottom line, Morrison will dive heavily into the red, with JP Morgan predicting pre-tax losses could be £120m.

If Morrison is to survive after the full extent of the problems is known, he's going to need some help.

"Morrisons' biggest problem is that they don't seem to have any regard at all for the financial community," says Verdict Research analyst Andrea Cockram. "That's really quite worrying given that these are the people they need to talk round. The statement the other day almost looked like it was designed to antagonise people. The figures looked that they had been plucked from the air - they might not have been but you got that impression. They've a lot of work to do to repair that image."

Morrison's decision to promote his right-hand man Bob Stott to the job of chief executive never washed with the City. A new finance director has been found in the RAC's Richard Pennycock, but he doesn't start until the autumn. It has been left to Next chairman David Jones, Morrison's only non-executive director, to patch up the wounds in the City by finding new recruits for the boardroom.

The first appointment could come as early as this week, with a second the week afterwards. City rumours suggest there hasn't been a long line of potential Morrisons' directors queuing up to join a business still dominated by an autocratic septuagenarian. Lloyds TSB finance director Helen Weir was tipped to take the job, but has subsequently dropped out of the running. While heavyweight experience such as Weir's will be required to get investors back on side, Jones is said to be struggling to find the right candidates.

With a board that has lost the confidence of the City and a depressed share price, some speculators see the possibility of a takeover looming. Less optimistic observers can't imagine anyone being willing to shell out for the company in its current state of disrepair, particularly now that private equity firms are getting scared of retail thanks to the deepening fears of a UK consumer recession.

There's also a chance that the Morrisons' board will look to find a way to extract value from its property portfolio - a notion which has been keeping a prop on the shares at their current level of around 180p. But there's little prospect of any such financial engineering taking place until the finance director has had a chance to get his feet under the desk.

Looking to the shorter term, if the guide to profits that Morrison announced last week turns out to have been little more than a finger in the wind there will definitely be trouble afoot. Anything towards the bottom end of the £50m to £150m range would be bad, anything below that would be fatal. Morrison is already on borrowed time. If there was a sixth strike he would unquestionably be out.