Retailing - it's all about location, location, location.

From City AM:

... [Morrisons supermarkets] is paying the price for its scatter gun approach to buying convenience stores. Last week, it emerged Morrisons is considering a sell-off of its 150-strong M Local estate to a consortium of investors just months after closing 23 shops...

Had it moved into the market earlier and picked stores in better locations at competitive prices, then it could have been better placed today, Jonathan de Mello, head of retail consultancy at Harper Dennis Hobbs, told City A.M.

“The main challenge facing the sector is the fact that it is becoming increasingly crowded, and Tesco, Sainsburys and M&S Simply Food – given first mover advantage – were able to cherry pick the best sites.

"[Morrisons’] desperation to build a critical mass of convenience stores to catch up with the competition led it to over-bid for sites in order to secure them – often with Tesco and Sainsburys only bidding to push up the price as much as possible.

“Average turnover of an M-Local store for example is circa [sic] half the average turnover of Tesco Metro – a function of poor site selection. This issue was compounded by the high rent being paid in order to secure the site – leading to very low or negative margins. Morrisons are right to dispose of their stores at this stage given this, and need to start afresh once they have stabilised their core supermarket business,” de Mello said.

This was also part of the reason for Tesco doing so badly recently. Their success in the 1990s and 2000s was not so much down to their skill as retailers, but the fact that their crack squad of land specialists had snapped up a load of good sites cheaply in the 1990s and stifled the opposition with various planning ruses.

Tesco executives thought "We are opening new stores and profits are going up. Which means we are better at retailing than the others, and that if we keep opening new stores, profits will continue to go up". This was all hubris. Truth of the matter is, they are no better or worse at the actual 'retailing' bit than the rest of the competition and all they were doing was tapping into the hidden profits which they had already secured back in the 1990s when the best locations were cheap.

Wm Morrison's

From the BBC:

Morrisons sees surge in profits

The UK's fourth-largest supermarket, Morrisons saw half-year pre-tax profits rise 45%, saying new customers had been drawn in by its prices in the downturn...

OK. Stop right there. The 45% figure is vastly inflated by a one-off £91 million paper gain which arose because they changed the rules of their pension scheme, which is now based on 'Career Average Revalued Earnings' instead of final salary. Let's strip it down to its basics and and compare the twenty-six week period ending 2 August 2009 with the period ending 3 August 2008, figures from here:

Staff numbers: 131,000 (124,000) up 5.6%
Net selling space: 11.4 million (11.1 million) up 2.7%
Sales (net of VAT): £7,548 million (£7,105 million) up 5.0%
Gross profit: £518 million (£436 million) up 18.8%
Gross profit margin: 6.9% (6.1%) up 0.8%

The increases in staff numbers, net selling space and sales are pretty much in line, but isn't there one figure there that sticks out like a sore thumb - the increase in gross profit? In these straitened times, how did they manage to improve their gross profit margin from 6.1% to 6.9%?

No doubt a large part of the difference arose from the VAT cut. VAT was 14.9% of total selling prices in the previous period and 13% in the later one*, which would improve the gross margin on sales of VAT-able items by 1.9%. Their fuel sales account for a fifth of total sales by value and let's assume another fifth for alcoholic drinks, sweets and biscuits and so on, so assuming they kept the benefit of the VAT cut, we'd expect to see gross margins improve by two-fifths of 1.9% = 0.8%, which is pretty much what happened.

So the Big Fat Lie that politicians like to perpetrate, that "VAT is borne by the consumer and doesn't hurt the producer" is exposed yet again as a Big Fat Lie. Even it it were true, then so what? Every extra £1 we are forced to pay in VAT in one shop reduces the amount that we can spend, save or invest elsewhere, so to suggest that "it doesn't hurt the producer" is laughable - because a reduction in VAT clearly benefits the producer - even if the first part of that statement were true (which it isn't).

* They used to have to hand over £17.50 for every £117.50 gross sales = 14.89% and now they only have to hand over £15.00 for every £115.00 gross sales = 13.04%. Of course, they 'reclaim' the input VAT that they've already paid to their suppliers, but their suppliers then just hand it over to the taxman - whichever way you look at it, the total VAT payable to the taxman (whether directly or indirectly) stays the same.