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Morrisons chingford store

Morrisons has warned of the pressure of rising commodity costs and the HGV driver shortage on food prices as it delivered its half-year trading update.

The supermarket said it had delivered lower prices despite various price pressures in commodities and freight and higher HGV costs. However, by the end of the period these industry-wide price and cost increases had become sustained, meaning deflation had transitioned to slight inflation, and the pressures were expected to persist during the second half.

“As well as the direct effects of the pandemic, other features of the first half this year were the impacts of rising commodity prices and freight inflation, plus a shortage of HGV drivers across the UK,” the trading update said. “We absorbed many of these industry-wide price and cost pressures, which was an investment in margin, and helped us sustain lower prices and deflation for customers.”

It added: “We expect some industry-wide retail price inflation during the second half, driven by sustained recent commodity price increases and freight inflation, and the current shortage of HGV drivers.

“We will seek to mitigate these and other potential cost increases, such as any incurred to maintain good on-shelf availability.”

Morrisons saw like-for-like sales fall 3.7% in the second quarter to 1 August against “tough” year-on-year comparatives, while first-half pre-tax profits fell by more than a third due to Covid costs and business rates.

First-half group like-for-like sales were down 0.3%, with retail deown 1.4% and wholesale up 1%.

Two-year like-for-like sales were up 8.4%, with both quarters very similar: Q1 up 8.7% and Q2 up 8.1%.

Second-quarter like-for-like revenues, excluding fuel, dropped 3.7%, with retail sales down 4.6% and wholesale up 0.9%.

The Q2 retail performance was “against a very tough” year-on-year comparative of 11.1%, with two-year retail like-for-likes up 6.4%, with the eat-at-home and online grocery markets remaining larger than in 2019.

Wholesale performance was up by the equivalent of 18.1% on a like-for-like basis in the first half, boosted by 230 extra McColl’s stores and new supply arrangements, including buying group Unitas, wholesaler Blakemore and two other convenience forecourt retailers.

It also sustained strong growth online, with Morrisons.com and ‘Morrisons on Amazon’ contributing to 48% year-on-year growth in the channel, or 237.1% on a two-year basis.

Total revenues for the first six months of the year, including fuel, were up 3.7% to £9.05bn.

Headline sales were helped by fuel sales, which were up 26.9% to £1.51bn, recovering gradually as the UK opened up from lockdown.

Operating profit before exceptionals was down 28.6% to £157m, while EBITDA before exceptionals was down 10.6% to £439m, with margin down 77bps to 4.9%.

Profit before tax and exceptionals was down 37.1% to £105m.

Morrisons said direct profit comparisons were “difficult” due to the year being significantly impacted by Covid-19.

Morrisons paid £93m more business rates during the first half of 2021/22 compared with the first half of 2020/21 as it paid the majority of its business rates in a lump sum towards the end of the year last year, as it waived its right to rates relief.

Without this timing impact, profit before tax and exceptionals would have been £74m for the first half of 2020/21 compared with £105m for 2021/22, meaning a 41.9% increase this year on last year.

However, direct Covid-19 costs associated with the pandemic were £41m in the first half of the year, compared with £155m in the same period last year.

Finally, with the majority of its cafés closed until mid-May, and fuel and food-to-go volume recovering gradually throughout the first half of 2021/22, it incurred considerable lost profit of £80m in these key areas of our business compared with pre-Covid.

Morrisons also pointed to rising cost pressures, driven by rising commodity prices and freight inflation, plus a shortage of HGV drivers across the UK. It said it absorbed many of these industry-wide price and cost pressures, which was an investment in margin.

It said it expects full-year profit before tax and exceptionals including rates paid to be higher than the £431m achieved in 2020/21, excluding the £230m waived rates relief.

Assumptions for the second half include significantly lower lost profit, minimal further direct Covid-19 costs, and mitigation of potential sustained cost increases in the supply chain.

For 2022/23, Morrisons pointed to material benefits of both no direct Covid-19 costs and the full recovery of lost profit, and said it remained confident of a year of meaningful profit growth.

Chairman Andrew Higginson said: “Across the business the whole Morrisons team has shown commendable resilience facing into a variety of continuing challenges during the first half, including the ongoing pandemic, disruption at some of our partner suppliers, and the impact on our supply chain of HGV driver shortages.

“As we approach our busiest time of year, I’m confident the team will continue to rise to all challenges and keep up all the good work to improve the shopping trip for customers.”

CEO David Potts added: “I want to thank all Morrisons colleagues for their unswerving dedication and commitment during the long pandemic period. Their innovation, enterprise, hard work and boundless compassion have shone through, and a new Morrisons is taking shape. You are a special team and together have built a strong and broad foundation on which Morrisons will thrive in the future.”

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