Market Analysis: Morrisons M&A Update, ASOS - Chasing Growth, Just Eat Takeaway - Competition From Germany

This week's Market Analysis starts with Ross Hindle, retail sector analyst at Third Bridge, reporting on how the M&A situation is progressing at Morrisons:

"The first thing that makes Morrisons very attractive from a private equity point of view is their property portfolio. They’re around 85% freehold and their estate is valued at over GBP 8bn."

"Morrisons, like the rest of the big four, has finally figured out how to deal with the price threat of Aldi and Lidl. Greater efficiency has enabled them to drive down prices and slow the march of the discounters. With the UK grocery business at saturation point, it is unlikely we'll see any major new entrants into the market."

"Morrisons operates a vertical integration model. While many hail vertical integration as a Morrisons' differentiator, offering provenance, traceability, freshness, and price flex', it also means the supermarket can’t shop around for value. Sometimes their abattoirs, fruit and veg' packing plants, and chilled food production sites don’t operate at full capacity."

"Morrisons has an advantage online over the discounters and given the structural shift we saw under lockdown this should become an even bigger opportunity."

"Morrisons has an attractive wholesale business, some call it a jewel in the crown of their entire operation. Our experts say that an acquisition or additional wholesale expertise would help to fully leverage this strength."

"Morrisons has around 500 stores of which close to 10% are loss-making. This means there is an opportunity for disposals."

"The Morrisons Market Street operation is very labour-intensive but something of a sacred cow within the supermarket's culture. Our experts say there is an opportunity to trim the number of in-store bakeries and dedicated butchers because many customers simply want convenience. Tesco has mostly removed fresh food counters over the last two years without damaging its reputation."

"The labour costs at Morrisons are around one percent higher per store than its rivals."

"Our experts say Morrisons’ logistics operation does not perform as well as the rest of the Big Four. The supermarket's management team have put significant investment into refurbishing stores but the back end of the business has received less investment."

"Morrisons was slow to sell clothing and non-food products, and given their popularity, they could now devote more floor space to these items."

Harry Barnick, Senior Analyst at Third Bridge comments on ASOS.

"ASOS' results were boosted by the UK's national lockdown, which continued well into Q2, forcing customers to shop online."

"ASOS is currently enjoying a further boost as consumers ditch their tracksuits for more stylish outfits and 'going out' clothes."

"The big question is how long this increase in demand can last and whether there is a resurgence in the high street and a broader return to offline sales."

"As boohoo is bogged down by its supply chain scandal, sustainability has taken centre-stage in the fast fashion landscape. This creates problems for ASOS as the switch to natural fibres can be complex and costly."

"Nordstrom's investment in Topshop via an ASOS joint venture signals the huge opportunity for both brands in the US. ASOS is chasing growth in this market and Nordstrom's distribution channel increases eyeballs on the Topshop product. It also paves the way for increased cooperation between the two groups which could lead to ASOS distributing additional brands in Nordstrom stores."

"Our experts consider ASOS to be opportunistic rather than strategic in its M&A approach. With this in mind, if the right assets come up for sale, ASOS may well show an interest."

Just Eat Takeaway is facing competition from Germany according to Dan Thomas, Senior Analyst at Third Bridge. "Food delivery platforms continue to see good order growth despite the UK opening up again. However, profitability is being constrained by a growing number of less profitable orders."

"Just Eat Takeaway is facing mounting competition in Germany as Delivery Hero is relaunching under its Foodpanda brand. Customer offers and expanding delivery will potentially crimp margins in one of the company’s most profitable markets. Just Eat Takeaway dominates the market with its Lieferando brand but the future looks markedly more competitive."

"Just Eat Takeaway may look to expand into groceries in the UK, joining the cluster of start-ups seeking to dominate this growing category."

Third Bridge is a global primary research firm that interviews more than 6,000 internationally recognised industry experts and business leaders a year to compile 360-degree market intelligence for institutional investors. www.thirdbridge.com