Vertical Integration via Hong Kong?

Yesterday saw the formal opening of the Morrisons sourcing office in Hong Kong with Dalton Philips, Richard Hodgson and Morrisons HK sourcing manager Bob Guard at the official ceremony and press call. The location has been on the official site for some time but it seems yesterday (22nd June) was the official launch of the office in Hong Kong.

As expected, a lot of the articles afterwards were pitched at the angle of it being great for Hong Kong that Morrisons were setting up camp there rather than in China for example. Lest we forget that this move for Morrisons is not before time but is another sign that Dalton Philips continues to aggressively pursue his strategic targets set out at the Interims in March.

Left- Right  Bob Guard – Morrisons HK Exec Director, Richard Hodgson (Commercial Dir), Dalton Philips (CEO) and Simon Galpin (Invest Hong Kong Exec Director) – (c) – Invest Hong Kong

The reason for Hong Kong being selected is that (we are told) the sound legal system replicates that of the UK with regards to establishing companies and the like, not only that but it’s on the doorstep of China and within 5 hours flying time to the major cities in the far east.

Dalton also indicates he feels they can make savings of up to double digit levels by dealing directly with manufacturers, they kicked off meetings on Tuesday with a large Microwave manufacturer who reach up to 1m units produced each week. As I’ll outline below, don’t expect a move into non food arenas like the competitors have chosen to do, rather having a good selection of good quality core non food instore with the sourcing office designed to bring quality and value non food items and to support the online launch.

There are expansion plans in place for the far eastern presence of Morrisons with opportunities to set up satellite offices in China and beyond but the regional hub will continue to be in Hong Kong.

Dalton says that it’s going to be a similar model to the vertical integration used in the UK, whereby middlemen are eliminated. Although Morrisons won’t be taking control of factories they will be working very closely to drive quality and value by getting to know the suppliers.

Indications are that domestic appliances, high quality toys and stationery will be sourced, these are available in many stores, with a new range being rolled out, using the ‘techno desk’ space which was generated after the new CINRAM agreement meant tagging of CD’s was already done upon delivery.

Space reclaimed for toys and non food with the elimination of ‘techno desk’

This won’t see a move to Tesco style Extra stores and a huge push of non food into stores though, recent disappointing results for the non food companies like Argos and Comet along with Tesco and Asda seeing non food buying habits change and slow down means that the ‘booming’ market isn’t what it once was.

Not only is the market stagnant but Morrisons (as alluded to before) can’t pull space from food to give to non food due to the Market Street format and extra food prep areas needed. With the new trial Produce area at Kirkstall taking up more space than it’s predecessor, if that’s rolled out nationally then project ‘liberate’ will generate space for that and the expanded Market Street format rather than a huge raft of space for non food.

I did hear that the morrisons.com launch using the Kiddicare platform was progressing well with teams ‘working flat out’ to source ranges ahead of the site going live in 2012 /2013. I’d expect this sourcing office to be a major plank in the online strategy for non food by guaranteeing supply of good quality products, as Morrisons don’t have a vast range in store then they’ll likely be ‘range gaps’ against the competition and the team will have to source those products from scratch – washing machines as a high level example. Another major plank of the strategy will be stores offering ‘click and collect’ which is efficient and popular.

Another strategic objective for Dalton Philips and Morrisons was his ‘project excavate’ whereby indirect spend (goods not for resale) – carrier bags, food bags, cardboard wine carriers etc would be targeted with a drive to improve terms to save the business money.

Dalton indicated at the AGM on 9th June that £330k had been saved by switching wine carrier supplier and that ‘nothing was out of scope’. New store builds, carrier bags, meat bags were all mentioned and £28m had already been saved which is 30% of the £100m target that was outlined at the Interims.

It’s therefore noteworthy that indirect spend is also mentioned as a possible avenue for sourcing in Hong Kong with Dalton saying ‘we could also save on carrier bags’ with the sourcing in HK. There is no doubt much more to be looked at with regard to sourcing of products and indirect items via this route.

The non food range as I mentioned isn’t extensive but has recently been relaunched with a core focus on cookware, homeware, bedding and a strong focus on seasonal items – the gardening range was massively improved upon this year, even for stores without the new Garden centre which is part of the Kirkstall trial.

In store, the Thornbury store have had the non food layout for some time but it was part of the Kirkstall remodelling (phase 3) when Peacocks clothing went into store that toys and party goods arrived.

The techno desk removal / rebalance of space (where there was no techno desk) happened at ThornburyGuiseley due to receive the update shortly.

New display equipment for electricals – a good strong core range.

A strong party and toy range – all shelf ready packaging!

A new bedding range is also available.

The homeware and entertainment revamp deserves a write up of it’s own so it will get another detailed look as there are some notable improvements in the cookware arena. All items come with a 5 year guarantee. They are also Teflon coated which is non-stick – a godsend for cooks up and down the land.

The HK office is another massive step on the way to the targets Dalton outlined at the interims in March ’11 and it’s my continuing belief (of course purely my belief, no internal metrics or anything like that) that the targets centred around efficiency saving and indirect spending targets will be exceeded.  There is a lot of scope to be targeted without any tangible reduction in quality or service levels, that’s without even considering a beating of sales and profit targets, I always believe the sales will look after themselves, certainly within Morrisons.