annual report 2012-13 morrision

8/19/2019 Annual Report 2012-13 Morrision

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Annual report and financial statements 2012/13

More of what matters

Wm Morrison Supermarkets PLC


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Annual report and financial statements 2012/13Performance and strategy review

Morrisons at a glance

Who we are

We are the UK’s fourth largestfood retailer by sales, with annualturnover in excess of £18bn. Wehave c500 stores across the UK,which includes 12 convenienceformats.

Over 11 million customers visitour stores each week, served by129,000 friendly colleagues.

We provide great service toour customers by offeringthe best value fresh food,prepared in-store byour experts.

We are unique because ofthe transparency of oursupply chain and our focuson traditional crafts – wedo more of what matters.

Financial performance 2012/13

Turnover £18.1bn

Like-for-like sales53 week v 53 week basis (2.1)%

Profit before tax £879m

Basic earningsper share 26.7p

Net debt £2.2bn

Total dividendper share 11.8p

Note: Throughout the Directors’ report and business review(1) Unless otherwise stated, 2012/13 refers to the 53 week period

ended 3 February 2013 and 2011/12 refers to the 52 week periodended 29 January 2012. 2012 and 2013 refer to calendar years.

(2) Underlying profit is defined as profit before one off costs andcredits, property transactions and IAS 19 pension interest, at a

normalised tax rate, as reconciled in note 1 of the Group f inancialstatements. Underlying operating profit is operating profit beforeproperty disposals.

(3) Like-for-like sales reflects the percentage change in year-on-yearstore sales (excluding VAT and fuel), stripping out the impact ofnew store openings and closures in the current or previousfinancial year.


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1 1

Directors’ report and businessreview

Performance and strategy review

2 Our business model – doing more of what matters4 Understanding our customers and the challenges of our

marketplace6 Chairman’s review8 Chief Executive’s review12 Focused on our strategic objectives14 Measuring performance against our strategic objectives16 Driving the topline

19 Increasing efficiency21 Capturing growth24 Financial review28 Managing risks and uncertainties30 More of what matters for our people33 Corporate responsibility

Governance

36 Board of Directors and Management Board40 Corporate governance report45 Directors’ remuneration report55 General information58 Statement of Directors’ responsibilities

Financial statements59 Group financial statements

59 Independent auditor’s report60 Consolidated statement of comprehensive income61 Consolidated balance sheet62 Consolidated cash flow statement63 Consolidated statement of changes in equity64 Group accounting policies70 Notes to the Group financial statements

96 Company financial statements96 Company balance sheet97 Company accounting policies100 Notes to the Company financial statements

Investor information109 Five year summary of results110 Supplementary information111 Investor relations and financial calendar

• Increase our accessibility to customersby building our convenience portfolioto 100 stores

• Continue to offer great value onMarket Street with our ‘pick of thestreet’ deals

• Launch Morrisons online food offerin 2014

WHAT WE SAID WE WOULD DO

WHAT WE DID

WHAT WE WILL DO NEXT

How we’ve performed againstour strategic objectives

• Deliver even better value forour customers

• Develop our core business throughopening more supermarkets and

convenience stores

• Continue to exploremulti-channel capabilities

• Continued to offer customers greatvalue on fresh food prepared in store

• Opened 17 new stores and nine

convenience stores• Launched Morrisons Cellar, developed

our Kiddicare online offer andcontinued to explore food online

Performance and strategy reviewGovernanceFinancial statements


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Performance and strategy review Annual report and financial statements 2012/13

99

58

90

85

8470South Central

South East

South West

Midlands

North

Scotland

Key

Head office

Online head office

Distribution centres

ManufacturingM local

Supermarkets

What we doOur business model is underpinned bythe manufacturing and sourcing of greatfood, sold across our stores by our friendlypeople – put simply we make, we buy,we move and we sell.

Our business model –doing more of what matters

Where we do itWe operate throughout the UK so we’recloser to our suppliers and customers –the people who matter.

We are proud to be a British Group and close to both ourcustomers and suppliers.

We are continuing to grow so that we can reach even morecustomers. In 2013/14 we plan to open 20 stores and increaseour convenience store portfolio to 100. Our continued storeroll out means we’re creating local jobs across the UK.

We work closely with our communities to support local initiatives,such as Let’s Grow (our fun educational scheme for schools) andRaise a Smile (our charity partnership scheme).

Morrisons has grown from a market stall in Bradford tothe UK’s fourth largest supermarket group with c500stores including 12 Morrisons M local convenience stores.We employ 129,000 people across our business, includingover 5,000 trained butchers, bakers and fishmongers.We have over 600 lorries and 150,000 trolleys!

Each of our stores (including convenience) has its ownMarket Street, complete with trained colleagues usingtheir craft skills to bring fresh products to our customers,prepared just the way they like it. Every day in-store webake 128,000 loaves, filet 5,000 fish and make 11,500sandwiches. We make more fresh food in-store thanany other supermarket.

We have always cared about the origin of our food.In the 1960s we began sourcing our meat from WoodheadBrothers, a company which became part of the Morrisonsfamily in 1991. We are now the UK’s second largest freshfood manufacturer and our vertical integration gives us bothtransparency over our supply chain and the flexibility torun industry leading promotions to support our profitability.

Our business model has evolved to reflect the changingdemands of today’s consumer, in particular ‘when,where and how’ they shop. We continue to invest in theconvenience market, recently buying 62 stores from otherretailers. We have made progress with our multi-channeloffer, with Kiddicare and Morrisons Cellar, and the

development of our online food proposition.

Our head office, logistics and distribution teams support ourstores and we continuously invest in technology. Our Evolveprogramme has helped us increase efficiency by making surewe have the right systems in place to deliver continuousimprovement across our operations.

We recognise the importance of developing our people andthe Morrisons Academy gives colleagues the opportunityto learn skills to take them from ‘shop floor to top floor’.

We are committed to behaving responsibly (page 33) ineverything we do, for example reducing waste throughour Great Taste, Less Waste scheme.

We understand the need to protect our business fromoperational and reputational risk. Details of our riskmanagement and mitigating factors are set out on page 28.


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S e r vi c e

V a

l u e

F r e s h

M a x i m

i s i n

g v a l ue

f or o u r

s h a r e

h o l d

e r

s


How we do it differently We provide great service to our customers byoffering the best value fresh food, prepared in-storeby our experts. We are unique because of thetransparency of our supply chain and our focus ontraditional crafts.

Servicemore of what matters

• craft skills in-store – see andtaste the food on Market Street

• friendly people, offering thebest advice and service

• knowledgeable HOT(Hello, Offer, Thank) service

We pride ourselves on our in-store craft skills.We have over 5,000 trained butchers, bakersand fishmongers preparing food and deliveringexactly what our customers want, tailored to

suit local markets.

Freshmore of what matters

• fresh food – from field to fork,catch to kitchen in hours

• made from scratch in-store every day• vertical integration – we own the supply

chain and we source locally• we guarantee our fresh credentials

In Market Street our customers can see their food beingprepared. Even our Morrisons M local stores haveMarket Street made products giving customersthe same great fresh food.

Owning our supply chain means weknow where our food comes from.We can also react more quickly tocustomer demands throughout theday, resulting in less waste.

Valuemore of what matters

• honest prices – affordable for everyone• transparent promotions• great availability

We price our food honestly to offer the best value toour customers. Our vertical integration allows us to driveout efficiencies and quickly pass savings on to customers.

How we’re building on

FreshValueService


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£

Understanding our customersand the challenges of our marketplace

Challenging economic conditions

The economy continues to be extremely challenging and thetough trading conditions look set to remain as the UK facesslow economic growth.

Inflation averaged 2.8%1 through the year, with CPI food inflationaveraging 4.1%1. Inflation remains the number one issue forconsumers with rises in food and commodity prices outstrippingwage growth. This ‘squeeze’ is being felt by a wider group ofpeople than ever.

Average earnings CPI inflat ion

2007 20122008 2009 2010 2011

%

Average earnings and inflation

0

1

2

3

4

5

6

source: Capital Economics

Consumer confidence remains low, c60%2 of households areworried about their levels of debt; c50%2 of consumers arestruggling to manage until payday and over 50%2 of householdshave little or no savings.

1 source: Office of National Statistics2 source: Association of Business Recovery Practitioners, 2012

74%3 monitor item pricing as a wayto manage their budget

63%3 look more closely at the priceof products before decidingwhat to buy

44%3

take more time choosingtheir groceries

3 source: IGD, 2012

As a result of these external pressures, customers are becomingincreasingly savvy about when, where and how they shop, tradingdown and using coupons, only buying what’s needed and usingthe internet to check prices and shop around for the best deals.


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Value is more crucial than ever

Value remains the number one driver of store choice and is atthe forefront of shoppers’ minds. There has been a further shiftin 2012, as low prices become the biggest consideration of valueacross all socio-economic groups.

Promotions in isolation are no longer seen as a differentiatorand customers expect more personalised offers and vouchers.Our promotions, such as ‘Fuel Saver’, have been well receivedby customers.

Value for money

Local

Saves money on shopping

Good parking

Consistently low prices

Product availability

Great quality food

Range of fresh food

64

60

53

49

47

45

41

33

Stated importance – most importantaspects in driving store choice (%)

source: Drivers of store choice (IPI), Kantar segmentation panel, October 2012

Own label growth

Retailer own brand sales have again performed more stronglythan branded products this year, as customers seek efficientways to manage their budgets.

Value ranges in particular have seen the most significant growthand the M savers range remains a key part of our value proposition.

New channels to market

The marketplace is continually evolving and being truly multi-channel has never been more important. Customers want tobuy ‘how and when they want’ evidenced by significant growthin online and convenience channels.

In 2012, the online grocery market grew by 15.7%4 and onlinesales now account for 3.9%4 of the market. Online groceryretail is expected to almost double4 over the next five years assmartphone, tablets and other technology enhancements makeonline access easier.

Customers also demand easy access to convenience stores withalmost half of all households ‘topping up’ on staple productsand shopping three or more times per week in order to reducewaste. Morrisons has made progress in the convenience channel,opening nine stores this year, with plans to reach 100 by the endof 2013/14.

Development of these channels represents an opportunity to gainmarket share and continue to meet the needs of our customers.4source: IGD

2012

2017

Actual Forecast

Convenience sales – £bn

source: IGD

33.9

43.6

2012

2017

Online sales – £bn

5.6

11.1

11.8%Value of UK grocery

market: £101bnMorrisons market share:source: Kantar Worldpanel


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Chairman’s review –delivering value in the short term and for the long term

As anticipated, market conditionsduring the year have been challenging

with ongoing commodity inflationcontinuing to put further pressureon household budgets and an alreadyfragile consumer confidence.

Against this difficult backdrop, Morrisons has worked hard todeliver a unique combination of value, freshness and quality toits customers. Although our overall performance has not been asgood as we would have wished, an increase in underlying earningsper share and a significant increase in the dividend demonstrateboth the resilience of our business model in a tough economicenvironment and the Board’s confidence in the future.

At the start of the year, we outlined a range of strategic initiatives:the essential building blocks needed to support the developmentof our business. These initiatives will enable us to deliver, over time,profitable sales growth, make Morrisons more efficient and securenew growth opportunities to deliver enhanced long term valueto shareholders. I am delighted to report that we have madereal progress in all these areas, particularly in the accelerateddevelopment of our convenience store programme and ourdecision to launch Morrisons online food offer in 2014.

We will continue to implement a wide range of measures to addressthe sales performance of the business, and progress our strategicinitiatives in order to provide a platform for successful long termgrowth. Our expectations are that the challenging consumerand market environment we saw in 2012 will persist through

the coming year.

Operational highlights

Underlying profitbefore tax £901mUnderlying earningsper share 27.3p

Final proposeddividend per share 8.31p

Profit share pool

for colleagues £46m

Raised for Savethe Children charity £2.1mResults

Profit before tax of £879m was 7% below prior year. The underlyingoperating margin of 5.2% fell by 30bps compared to last year.Adjusting for the impact of a higher proportion of fuel sales inthe mix this year, the reduction was 20bps.

Net finance costs were £70m, an increase of £44m over the

prior period, of which £17m related to IAS 19 pension interest.The balance was primarily a result of a planned increase in netdebt arising from an additional investment in capital expenditureand an acceleration of the equity retirement programme.

Our strategic objectives

See page 12 for further information

How our KPIs link to strategy See page 14 for further information

See our reportvisit: morrisons.co.uk/corporate/ar2013

Sir Ian GibsonChairman


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Underlying profit is calculated after removing property disposals,multi-channel and convenience development costs and IAS 19pension interest. Underlying operating profit of £950m fell by£24m (2%) when compared to the prior year, with underlyingprofit before tax of £901m down by 4%.

Underlying basic earnings per share (EPS) increased by 7% to27.3p (2011/12: 25.6p) with a reduction in the rate of corporationtax and the positive impact of the Group’s equity retirementprogramme more than offsetting a reduction in underlyingearnings. Statutory basic earnings per share of 26.7p werein line with the previous year.

In accordance with our policy of increasing the dividend in line withunderlying earnings growth, subject to a minimum increase of 10%

in each of the three years to 2013/14, the Board is recommendinga final dividend of 8.31p per share. This brings the total dividendfor the year to 11.80p, an increase of 10% on 2011/12. Thedividend is covered 2.3 times by underlying earnings.

Cash flow from operations of £1,432m was £168m (13%) higherthan in the previous year, primarily as a result of improved workingcapital management.

As anticipated, capital expenditure and investments rose slightlyto £1,016m, an increase of £115m (13%) over prior year. Thiscapital investment reflected a planned acceleration in our newstore opening programme, continuing investments in Evolve,our industry leading IT systems development programme,and continuing expansion of our vertical integration capacity.It also included new investments to support our multi-channelexpansion, through the addition of new Kiddicare stores and inan online shopping capability. We will continue to acceleratethese essential investments in future growth and expect capitalexpenditure in 2013/14 to be £1.1bn, which includes £150mfor multi-channel development.

A further £579m was invested in our equity retirement programmeof which £65m related to the purchase of shares held in treasury.By the end of the financial year, a total of £947m had been investedand 312m shares had been cancelled in the period since wecommenced the programme in 2011. We have now met ourobjective of returning £1bn to shareholders, in addition to normaldividend payments, over the two years to March 2013. The

programme has had a positive impact of 4.2% on our reportedunderlying earnings per share in the year, and will have a furtherpositive impact in the year ahead.

Net debt rose as expected to £2,181m (2011/12: £1,471m),reflecting these investments and increased tax payments. Thisbrings our gearing to 42% – which remains a conservative levelfor the sector.

In line with its stated principles, the Group continues to maintaina strong balance sheet position. This is securely financed by anumber of long dated bonds and revolving credit facilities atcompetitive rates. During the period we strengthened our financialposition by increasing the funds available to the Group andextending the maturity profile of our borrowings. We increased

the revolving credit facilities we have with our banks, which areavailable until 2016, by a further £150m to £1,350m. In July2012 we issued a £400m sterling bond to institutional investorsrepayable in 2026, and in November 2012 we agreed a £200mterm loan with our bankers, repayable in 2014.

At the year end the Group had committed but undrawn facilitiesof £675m and a strong investment grade from Moody’s. In March 2012 we introduced Return on Capital Employed (ROCE)as a key performance measure, emphasising our focus on capitaldiscipline which was reflected in our decision to reduce plannedcapital expenditure during the year by £200m. ROCE fell slightlyduring the year to 9.6%, a consequence of like-for-like performanceheadwinds. We will continue to focus on delivering improvementsin this key measure over the coming years, although the immediatepriority is on driving our sales performance.

Industry recognition

Morrisons is committed to providing its customers with great

service and shop keeping, and to making it a great place to workfor our colleagues. This has again been recognised with a numberof prestigious industry awards. These include Grocer of the Year;Employer of the Year, for the third year in a row; Best Service atthe Grocer Gold awards; six Grocer Own Label Food and Drinkawards and Retail Week Employer of the Year for the secondsuccessive year.

Community and the environment

Our customers expect us to trade responsibly. We are committedto working with the communities in which we operate, maintainingethical standards and managing resources carefully.

Food matters to us; where it comes from and how it’s produced.Over the past year we have increased our support for British dairy

farmers and invested further in research into the long term viabilityof British farming. We continue to support the Government’sPublic Health Responsibility Deal and have committed to joina consistent national scheme of front of pack labelling.

Our Let’s Grow programme, which aims to support the nextgeneration of food growers, is currently in its fifth year and wehave donated £18m of gardening equipment to schools.

We have made good progress towards our long term energyreduction targets. Our colleagues and customers always go theextra mile to support our selected charity. For the third consecutiveyear we have worked with Save the Children and this year raisedover £2.1m.

Our colleaguesThese awards could not have been achieved without the dedication,hard work and passion of all our 129,000 colleagues throughoutthe business who every day seek to make Morrisons ‘Different andBetter Than Ever’ for the c11 million customers on average whovisit our stores each week. I am delighted that their efforts haveenabled them to share a profit share pool of £46m this year.

We believe in creating long term partnerships with our colleaguesby giving them the time, qualifications and support they need todevelop their skills. We have maintained our position as the largestprovider of apprenticeships in the UK with over 11,000 apprenticesgraduating during the year. We have supported this by provisionof over 750,000 training days, the introduction of a number ofspecialised development courses and the creation of MorrisonsCentre of Excellence.

On behalf of the Board, I want to express our thanks to every oneof our colleagues for their dedication, professionalism and servicethroughout the year.


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Chief Executive’s review –a clear vision and strategy that makes us different

This has been a challenging year forMorrisons but we have continued to

grow sales and invest in the long termsuccess of our business.

Customers have felt the effects of thetough economy but our strategy remainson track. We’re continuing to openconvenience stores, develop our onlinecapabilities and doing more of whatmatters to help our customers.

Operational highlights

Average basket spend(LFL basis) £22.85Market share 11.8%

1

Stores opened(includes nine convenience) 26Gross profit

£1.2bn

Over 2.7m customers visit ourFresh Format stores each week.

1 source: IGD

Our strategic objectives




Dalton PhilipsChief Executive


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Reinforce ourdifferences

Seize theopportunities


Turnover growth

During the period total turnover increased by 3% to £18.1bn(2011/12: £17.7bn). On a like-for-like basis, total store sales,excluding fuel, decreased slightly by 0.2% which included acontribution from new store openings of 1.9% and a decreasein like-for-like sales of 2.1%.

Disposable incomes continued to come under pressure duringthe year from the unwelcome impact of inflation on commodities,with the increasing price of oil again being felt at the pump andthroughout the supply chain. For the third year in a row, consumerswere faced with increases in the price of oil, albeit at a slower rate

than previously, and in this environment consumers shop aroundcarefully to find the best deals. Our ‘Fuel Britannia’ programmesand innovative ‘Fuel Saver’ initiative have proved highly attractiveto budget conscious drivers. Total fuel sales increased by 5.0%in the year.

Consumers also had to absorb the effects of significant increasesin the prices of other core commodities, adding to the pressureon household budgets. In this environment customers inevitablychanged their shopping habits. They shopped around in different

formats, using convenience stores for top up shopping, increasingtheir use of the online channel, putting fewer items into theirbaskets and managing their spend carefully. Average basket size,despite inflation, was in line with the prior year. However, althoughwe welcomed an average of 11.4m customers each week into ourstores, this was 0.4m fewer than in the prior year on a like-for-likebasis. Once again sales growth was generally strongest in Londonand the South East although it is a mixed picture and in all regionsof the country there are areas that are growing well.

Our below market sales performance was disappointing. Whilstwe are at a structural disadvantage in that we do not yet havea meaningful presence in either convenience stores or in online,the two fastest growing sectors of the market, we did not performas well as we should have in a trading environment that shouldhave played more to Morrisons strengths. Whilst our base pricingwas strong, we do need to do more to communicate our valuemessage and our unique points of difference. We did run somegood promotions but we need to do more to improve the overalleffectiveness of our promotional programme and ensure that ourpricing is clear and consistent. We will be addressing these issuesin the coming year.

Turnover analysis

Like-for-likestores

Othersales

2012/13Total

2011/12Total

In-store (£m) 13,294 380 13,674 13,436

Fuel (£m) 4,172 69 4,241 4,039

Other sales (£m) – 201 201 188

Total turnover (ex-VAT) (£m) 17,466 650 18,116 17,663

In-store sales

Sales per square foot (£) 20.24 11.70 19.84 20.74

Customer numbers per week (m) 11.0 0.4 11.4 11.4

Customer spend (£) 22.85 16.93 22.63 22.67

Our value proposition of everydaylow prices, coupled with industryleading offers, and the flexibilityof our vertical integration enabledus to meet our customers’ need forgreat fresh food at affordable prices.


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We bring great value fresh food to our

customers every day.

Chief Executive’s review – a clear vision and strategy that makes us different – continued

Operating results

Summary income statement2012/13

£m2011/12

£m

Turnover 18,116 17,663

Gross profit 1,206 1,217

Gross profit margin % 6.7% 6.9%

Other operating income 80 86

Administrative expenses (336) (329)

Underlying operating profit 950 974

Property transactions (1) (1)

Operating profit 949 973

Underlying operatingprofit margin % 5.2% 5.5%

Net finance charges (70) (26)

Taxation (232) (257)

Profit for the period 647 690

During the year Group turnover grew by 3%. In a low sales growthenvironment it is important that we manage our cost base tightly.After costs of goods sold, the two main areas of cost are storewages and distribution costs and we have continued to focus onimproving efficiency in both of these areas, whilst maintainingthe highest standards of customer service. During the year,with improved processes and systems, we were once again ableto improve our store labour costs relative to sales, with in-storelabour productivity increasing by 4%. The investments wehave made in systems improvements also enabled us to build onprevious successes by improving Distribution productivity by 4%.

Other operating income fell by £6m (7%) primarily due to adecrease in recycling credits.

Continuing the trend we reported last year, administrationexpenses increased by 2.1%, a rate below the rate of inflation,which reflects the Group’s commitment to ongoing strongcost control.


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Market overviewIn a tough economic climate, the UK grocery market continuedto be a very challenging environment in which to operate, withconsumers seeing no respite in the economy.

Market growth was driven by inflation, which averaged 2.8%1 during the year. CPI food inflation averaged 4.1%1 reaching5.5%1 by the end of the year. With commodity and energycosts increasing faster than average wages, household incomescontinued to be squeezed throughout 2012.

In 2012, the UK grocery market grew by 3.7%2 over the previousyear and was worth £101bn2. The fundamental changes that aretaking place in the market show shoppers being increasingly

drawn away from traditional supermarkets towards the online,convenience and discount channels.

The online grocery market grew by 15.7%3 during the year to£6.5bn3. Online sales now account for 3.9%3 of the UK grocerymarket and are expected to grow significantly faster thantraditional grocery over the coming years. The conveniencemarket too is expected to continue growing at a faster rate thanthe traditional grocery market for some time to come.

More shoppers now regard price as their first consideration whenchoosing between products compared with a year ago. Consumersare also growing increasingly forensic in the way they shop;building their knowledge of how much things cost, down tradingand switching to own label products, managing their consumption

and actively searching and taking advantage of promotions.

The proliferation of promotional activity amongst retailers hasdriven consumers to seek more personalised offers in returnfor their loyalty and spend. Retailers are responding to thisby leveraging their customer relationship management systemsand improving their in-store experience.

Strategy

In 2010 we outlined our vision to make Morrisons ‘Differentand Better than Ever’. Three years on, we believe that our visionis even more relevant today and that we have the right strategyto achieve it.

We are proud of what makes us different – a distinctive offer

to customers centred around fresh food, craft skills and verticalintegration through our manufacturing businesses; the way welead and support our colleagues; and our unique heritage. Being‘different’ means building on these advantages, which set us apartfrom all our competitors and position us to succeed. Being ‘betterthan ever’ is about improving the way we do business – doingmore of the things that matter for our customers – making greatfood, offering outstanding service and being more efficient sowe can pass on the best savings possible. It also means seizingopportunities to grow the business profitably through new formats,channels and categories, to meet more of our existing customers’needs and to reach new customers.

1 source: Office of National Statistics2 source: Kantar Worldpanel3 source: IGD

Our strategy reflects our view of how the market will evolve,what will be most appealing to our customers and how we makebest use of our existing capabilities. It is based on six convictionsabout the type of business that our customers want us to be:

• Food focused not generalist

• Experiential over purely functional

• Value is forever

• Skills not just drills

• General merchandise – clicks not bricks

• Multi-format and multi-channel

We set these convictions out for the first time last year and theyform the base for the business we are building today. Over thepast year we have seen continuing changes in the market. Valuefor money has come even more to the fore for consumers andthere is an ongoing shift towards multi-format, multi-channelshopping, with more and more general merchandise beingbought online. These changes confirm our convictions and weare confident that we have the right strategy for future growth.

We have a clearly defined set of initiatives which will enableus to deliver our vision. These are grouped under the three

strategic objectives of driving the topline, increasing efficiencyand capturing growth.


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Driving the topline

Increasing efficiency

Capturing growth

Focused on our strategic objectives

1Food focused not generalist ———————————————

2Experiential over purelyfunctional

———————————————

3Value is forever ———————————————

4 Skills not just drills ———————————————

5General merchandise– clicks not bricks ———————————————

6Multi-format andmulti-channel

Our convictionsOur vision reflects our view of how the marketwill evolve, what will be most appealing to ourcustomers and how we make best use of ourinternal capabilities. It is based on six convictionsabout the type of business that our customerswant us to be.

Our visionOur vision for the business, being Differentand Better than Ever, is anchored by ourconvictions, and we have a clearly definedset of strategic initiatives that will help usdeliver more of what matters.


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> Driving in-store productivity

> Tackling indirect procurement

> Revamping our systemsSee pages 19 to 20 for further information


> Completing National to Nationwide

> Strengthening our own brand

> Moving further ahead on freshSee pages 16 to 18 for further information

Driving the topline

> Becoming multi-channel

> Growing convenience

> Vertical integrationSee pages 21 to 23 for further information

Capturing growth


M e a s ur i n g p er f or m a n c e t h r o

u gh o ur K P I s

Our strategic objectivesOur strategic objectives are basedon our vision and our convictions.They are at the heart of Morrisons.

Our strategic initiativesOur strategic initiatives provide aframework for delivering more ofwhat matters in everything we do..


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Measuring performanceagainst our strategic objectives

We have identified measures thatare important to the success of theGroup’s financial performance andoperational excellence, and to ourstakeholders, customers, suppliersand colleagues. The Board considersthese in assessing the achievementof the Group’s strategy.

How do we identify our key performanceindicators (KPIs)?

There are many internal and external factors affectingthe performance of our business. We have focused on thekey indicators that are measurable, comparable, and canbe acted on to reflect the performance and progress ofour business. These KPIs have been identified to presenta fair, balanced and understandable picture of Morrisons.KPIs are reviewed regularly and updated as appropriate.

Why link our KPIs with our strategic objectives?

By linking our KPIs with our strategic objectives we areable to monitor and focus on areas that can be improved to

increase sales, efficiency and growth in the future and helpus achieve our vision of being ‘Different and Better than Ever’.

A strategy linked to sustainability

When we consider our future outlook and the goals wewish to achieve, we focus our attention on those areas ofgreatest significance to our business. We assess whetherthere are any potential sustainability issues relating tothese areas and make a direct link between the sustainabilitychallenges we face and our business strategy. We recognisethe importance of developing the right sustainability KPIs,so that we can evaluate our performance against our strategy.

M

ea s ur i ngper f or ma nc ea ga i ns t our s t r a t egi c ob j ec t i ves

UK grocery market share D G

DefinitionThe Group’s percentage of retail sales in the UK grocery sector, as measuredby Kantar Worldpanel at the end of January.

PerformanceOur market share has fallen slightly during the year.

We aim to grow our share by investing in new stores (including convenience)and continuing to develop our online offering.

2012/13 11.8%

2011/12 12.8%

2010/11 12.8%

Sales growth new D G

DefinitionMeasures sales across the Group, excluding VAT and fuel. Shows theimpact of space increases through investment in the store estate andthe convenience market.

PerformanceStore sales have grown by 1.8% to £13.7bn. The Group has increasedspace by 4.0%, reflecting 17 new stores and the opening of nine furtherconvenience stores.

2012/13 1.8%2011/12 3.9%

2010/11 4.0%

Like-for-like sales D

DefinitionMeasures the percentage change in year-on-year store sales (excluding VATand fuel), stripping out the impact of new store openings and closures in thecurrent or previous financial year.

PerformanceLike-for-like sales have decreased by 2.1% on a 53 week v 53 week basis,and decreased by 0.3% on a 53 week v 52 week basis. We aim to increaselike-for-like sales by continuing to strengthen our own brand and fresh foodoffering and enhancing the service we provide to our customers.

2012/13 (2.1)%

2011/12 1.8%

2010/11 0.9%

Key to KPIs

Financial KPIs

Non-financial KPIs

Key to strategic objectivesDelivering the toplineIncreasing efficiencyCapturing growth

D

E

G


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Underlying profit D E

DefinitionMeasures the normal underlying business performance. Profits are adjustedto remove volatile or one-off costs and credits. A reconciliation of underlyingprofit is provided in note 1 of the Group financial statements.

PerformanceUnderlying profit before tax decreased by £34m.

We plan to increase underlying profit by increasing like-for-like sales, openingnew stores and continuing to realise efficiencies across the business.

2012/13 £901m

2011/12 £935m

2010/11 £869m

Underlying basic earnings per share (EPS) D E

DefinitionThe EPS measure uses underlying profit, as def ined above, divided by theweighted average number of shares in issue at the year end date. A calculationis provided in note 9 of the Group f inancial statements.

PerformanceUnderlying basic EPS has increased to 27.3p, reflecting the benefit of the equityretirement plan. We aim to grow underlying EPS in line with underlying profit.

2012/13 27.3p

2011/12 25.6p

2010/11 23.0p

Net debt E

DefinitionThe Group’s overall debt position at the year end. A summary of net debt isprovided in note 25 of the Group financial statements.

PerformanceNet debt has increased by £710m, reflecting our planned acceleration in capitalexpenditure, investment in a multi-channel capability and our equity retirementprogramme. We will look to maintain our strong investment grade balance sheetgoing forward.

2012/13 £2,181m

2011/12 £1,471m

2010/11 £817m

Capital investment D E G

DefinitionMeasured as additions to property, plant and equipment, investment properties,intangible assets and investments.

PerformanceDuring the year, we invested £1,016m in capital projects reflecting ourcommitment to increasing space and investing in future growth, in particularthrough opening new stores (including convenience) and the Evolve programme.

2012/13 £1,016m

2011/12 £901m

2010/11 £592m

Return on capital employed (ROCE) E

DefinitionROCE is a relative profit measure showing the return generated from investmentin assets, see page 27.

PerformanceROCE decreased slightly during the year reflecting the weaker tradingperformance and increased capital spend on new stores.

2012/13 9.6%

2011/12 10.1%

2010/11 10.1%

Colleague engagement new D E

DefinitionColleague engagement is measured through our annual Climate surveys,supplemented by our shorter bi-monthly Pulse surveys. Participation in ourannual survey was >90%.

PerformanceDuring the year, colleague engagement improved by 6.2%.

2012/13 75.6pts

2011/12 71.2pts

2010/11 69.5pts

Carbon footprint reduction E

DefinitionOur carbon footprint includes energy, waste, refrigeration and transportfor our stores, offices, manufacturing and packing facilities.

PerformanceWe have set a long term commitment to reduce emissions in absolute termsby 30% by 2020 (2005 baseline). Progress slowed against continued businessexpansion but remains on a downward trend. We started measuring absolutereduction in 2010/11.

2012/13 19.3%

2011/12 14.6%

2010/11 12.0%

Waste to landfill reduction E

DefinitionMeasured as waste from our stores that we are unable to recycle or haveprocessed, expressed as a percentage of total waste compared to the prior year.

PerformanceOur commitment is to reduce direct waste to landf ill to zero by December 2013.We made further progress towards this target in the year.

2012/13 1.7%

2011/12 5.6%


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• Roll out our Fresh Format to90 stores

• Liberate 114,000 square feetof space

• Launch 5,000 new ownbrand lines

• Rolled out Fresh Format to over90 stores

• Continued to liberate space in ourgrocery aisles

• Launched over 5,000 own brandlines, including NuMe

• Continue the Fresh Format roll out,tailoring the concept to local markets

• Relaunch 10,000 productsby 2013/14

• Launch Nutmeg, Morrisons ownlabel children’s clothing

Own brand

Own brand lineslaunched this year 5,000Sales growth ofM savers brand 37%

Completing National to Nationwide

There are currently 6.4m householdsin Britain not in close proximity toa Morrisons store.

There are therefore significant opportunities for us to grow,particularly in the South where we are less well represented.

In March 2011, we announced an accelerated programme to open2.5m square feet of new space over the three years to 2013/14.During the current year we added a further 17 new core storesto our estate, including three replacement stores, as well as nineconvenience format stores. We ended the year with 13.4msquare feet of net retail space in total and an estate of 498 stores,including 12 in convenience format. Including convenience stores,our overall net selling space increased by 517,000 square feet(4.0%), of which 40,000 square feet came from extensions. This isin line with the revised target we set out at the time of our interimresults in September 2012 and is a result of our determination tomaintain capital discipline in a period of difficult trading. It alsoreflects a recognition that it is important that management is ableto fully focus on current trading and our ambitious growth agenda.Deferring the addition of some of our planned new stores helpsachieve these objectives.

We will maintain this approach in 2013/14, when we now expectto add a further 500,000 square feet of new space, a decreaseof 44% from our previous guidance. Over the three years to2013/14 we have reduced the amount of core space we will openby 800,000 square feet (32%) from our original target, and nowexpect to add a total of 1.7m square feet over that period. Thisexcludes convenience space, which was not included in our originalestimates. In 2013/14 we also expect to add 250,000 square feetof new space from the convenience channel.

Driving the topline


WHAT WE DID



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Our meat goes from field to forkin a matter of hours.


Strengthening our own brand

Having great own brand productscan give customers a reason toswitch supermarkets.

Based on intensive research and customer insight, we are now

around half way through a three year programme to deliver greaterquality, whilst maintaining our strong value perception acrossthe whole of our own brand range of some 10,000 products byChristmas 2013.

Since the programme started, we have re-launched over 5,000products and introduced four new Morrisons brands, in additionto our core range of everyday family favourites, and we have hadgreat feedback from our customers.

M Kitchen, our exciting range of ready meals, continues to progresswell, building on the success of its launch in 2011. M savers, ournew entry price-point range, is designed to be a clear propositionof good quality at the best price, in strong support of ourconviction that value is forever. This has resonated strongly with

our customers, making M savers the fastest growing value ownlabel brand in the year with market share growth of 110bps.The range now has over 500 products, which allows ourcustomers to do a full price led shop should they choose.

In May we announced the introduction of our new healthy eatingrange, NuMe, with over 300 products across chilled, ambient andfrozen categories. Customers are responding well to the broaderrange as well as to the healthier versions of old favourites. With thelaunch of our new premium M Signature range in March, which willinclude over 500 products when complete, we are well on our wayto building an appealing family of relevant brands. Our customers

have responded very positively and own label participation in oursales mix has increased consistently through the year and nowstands at 48.3%.

During the Autumn we re-launched Food To Go which nowincludes over 90 new and improved lines with a majority freshlymade in-store.

We have also announced that we will launch Nutmeg, our newrange of clothing for children aged 0 to 13, which will be availablein over 90 stores from March 2013.

“I always shop at Morrisons because

I know there’ll be a great selectionof fresh food available.”

Judith Hutton, customer, Leeds


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Driving the topline – continued

Moving further ahead on fresh

Fresh Format is about providingcustomers with the best fresh food inthe UK, unrivalled value for money andfantastic service from an environmentthat really feels different.

This initiative is a key part of our strategy and is underpinned byour core convictions that customers want fresh food, great value

and a more experiential and engaging shopping environment.

From the outset we have been very conscious that the new formatwould have to be tailored to reflect different stores sizes and therequirements of local demographics – one size would certainlynot fit all.

To highlight our points of difference and provide more of whatmatters to our customers, we have rationalised the space givenover to ambient grocery items and added a new ‘wow factor’ intoMarket Street, including introducing category experts to provideadvice to customers. In some stores we have knocked down wallsso that customers can see our craft skills in practice, and in otherswe have introduced children’s clothing, a category customers nowexpect to see in-store.

During the year we introduced new packaging and new signageto our fish counters. We trained over 1,000 fishmongers in howto prepare and advise on fish to encourage customers to enjoyour range of over 250 fish and seafood lines.

Our fruit and veg is so fresh it’s awardwinning – we’ve won produce retailerof the year three years running.

We have continued to build on the initial progress we made in2011 by applying the Fresh Format concept to a further 76 ofour existing stores, and implementing it in the 17 new stores weopened during the year. In all we have now introduced this newthinking into 105 stores in our estate. These stores now accountfor 26% of our retail store space and around 30% of our in-storesales, with over 2.7m customers now visiting a Fresh Format storeeach week. Customer feedback has been very positive.

The Fresh Format stores that have been updated with the newfresh concept continue to deliver like-for-like sales growth of 4%to 6% above their control group benchmark. Their sales and marginprogression is in line with the targets we set for them, and weare encouraged by their performance to date when comparedwith their control group. We will continue to use the learningsfrom these stores as we take the concept into smaller stores anddifferent demographics. We will tailor the core concept to meetlocal requirements, introducing only those elements that willmeet customers’ needs. We also have plans to expand our foodrange further and introduce new, relevant categories by reducingour non-food ranges rather than moving aisles or replacingrefrigeration, thereby reducing investment cost whilst meetingcustomer needs.

By the end of 2013/14 a further 100 stores will have benefited

from the new fresh treatment. This will be at a reduced averagecapital cost of £0.5m per store, which is contained within our2013/14 capital expenditure targets. This continuing evolutionwill see some 40% of our stores refreshed by the end of 2013/14.


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• Implement new IT systems at ourWoodheads meat manufacturing site

• Introduce a new distribution centreforecasting system

• Deliver £40m of efficiency savings

• Rolled out new financial systems toall three meat manufacturing sites

• Implemented our new distributioncentre forecasting system

• Continued to focus on cost control,delivering over £90m of savings

• Roll out supply chain forecastingsolution to four further distributioncentres

• Deliver new commercial systemsand processes to increase focuson promotions

• Deliver £100m of further

efficiency savings

Driving in-store productivity

Efficiency remains paramount,particularly in a low growth salesenvironment and with value for moneyat the forefront of customers’ minds.

We continue to look for better ways of working, to improve theservice we offer and to reduce unnecessary spend. We haveimplemented a number of long term initiatives to make Morrisonsmore efficient but always with the guiding principle that great

customer service is central to our business.

In March 2011 we launched an initiative to focus on in-storeproductivity and have made further good progress in the year,delivering productivity savings of 4% in addition to the £25mreported for 2011/12. During the year we completed the roll outof intelligent labour planning across Market Street, reconfiguredour check outs to reduce the amount of time required to process atill transaction, introduced more self service checkouts, increasedour case rates and redesigned a number of other work processesincluding receipting systems for newspapers and magazines.

Individually each of these is a relatively small benefit but asevery hour per day we save across all of our stores equates toapproximately £1.5m of annual cost saving, even small changes

can deliver big results.

During the coming year we will continue to trial and roll outnew ideas and we are well on track to deliver our target savingsof £100m by 2013/14.

Tackling indirect procurement

Our indirect procurement programmeaims to reduce the cost of our goods andservices without impacting customers.

Our colleagues have played a significant part in helping usto identify and remove unnecessary costs from the business.

The programme involves reviewing every area of spend in thebusiness, both revenue and capital expenditure, looking for waysto sensibly reduce cost, including the use of e-auctions, ratenegotiations, consolidating spend and reducing consumption.During the year we made further good progress delivering a further£45m of annual revenue benefit in addition to the £40m weachieved in 2011/12.

Some of the initiatives, such as rationalising our waste collectionsand consolidating the purchase of consumables, were significant.Others, including the respecification of our flower buckets, the

consolidation and renegotiation of napkins purchases, a reductionin postage stamps and the introduction of energy-efficient lighting,were smaller, but they are all contributing to our cost savingstargets. We are on track to deliver our planned savings of £100mannually by 2013/14.

Key savings

In-store and distributionproductivityimprovements in2012/13

4%

Indirect procurementsavings £45m

WHAT WE DID




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Our Evolve programme has delivered significantimprovements across all areas of the business.

Increasing efficiency – continued

Revamping our systems

We are now well over the half way stageof our six year Evolve programme.

When complete, the programme will replace all the systems in ourbusiness and provide us with industry leading software capability.Throughout the life of the programme we have taken great care tomanage it through a comprehensive governance process, including

external assurance, to enable us to carefully manage any risks tothe business. As expected, it has been a long journey but we aredelighted with the improvements we are delivering to the business.

2012/13 saw the deployment of new systems to many parts of thebusiness. During the year we concluded the implementation of ourEPOS till system, introducing it into our petrol filling stations andour stores. We substantially completed the roll out of new meatmanufacturing solutions in Woodheads which link our buying,delivery, production and despatch to stores processes onto a singlesystem, helping us to trace our meat products from ‘field to fork’.We also commenced the implementation of the important supplychain module which has initially been introduced into theStockton warehouse and will ultimately enable us to consolidateour accounting, supplier ordering and distribution systems ontoa single platform.

This is a significant step towards us delivering improved inventorycontrol across the business.

All of these completed projects are now providing the benefitsexpected in our business case and during the year the programmedelivered a further £28m of savings.

In the coming year we will be building still further on this solid

base and will be making changes to our core manufacturing,logistics, trading and retail systems, supported by improvedmanagement information. We are on track to meet our targetof delivering £100m of annual benefits by 2013/14.

“The last few years have seen a lotof changes in the way we work,but we’ve made sure we keep great

customer service at the forefrontof everything we do.”

Paul Finch, Store Manager, Cheadle Heath


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Capturing growth

Becoming multi-channel

Customers are changing the waythey shop.

Online, with a total market value of £31bn and forecast growthof 13.6% in 2013 is now the fastest growing channel in the UK.General merchandise is migrating online, away from the highstreet and from ‘big box’ supermarkets. There is a significanttrend towards the growth of the multi-channel retailer and thisis an exciting opportunity for Morrisons.

Morrisons took the first steps in establishing itself in online retailthrough its acquisition, in 2011, of Kiddicare, a leading online babyand infant merchandising retailer. We have expanded Kiddicare asa true multi-channel retailer. In March we announced the acquisitionof ten stores from Best Buy which will be converted into flagshipKiddicare showrooms to support its online proposition, allowingcustomers to try before they buy. We are making good progresswith our store opening programme, having opened stores inNottingham, Dudley and Thurrock during the year. Since the yearend, our new Rotherham store has opened and six further outletsare planned for 2013. We are also leveraging the c11 millioncustomers who shop in Morrisons each week by increasing theirawareness of the Kiddicare business.

As planned, we have continued to integrate Morrisons and

Kiddicare brands using Kiddicare’s industry leading technologyplatform to provide the foundation for Morrisons first own onlineoffer. In the second half of the year we launched Morrisons Cellar,to offer an outstanding range of wines at great prices, withfulfilment from our distribution centre in Peterborough. We alsoannounced that in the Spring of 2013 we will expand our non-foodbusiness online by entering a partnership with Lakeland, offeringkitchenware to customers through Morrisons.com. We willcontinue to expand our online presence by adding further newcategories that are relevant to our customers. In order to supportour multi-channel non-food ambitions we have appointed NigelRobertson as CEO of Kiddicare, with overall responsibility for allMorrisons general merchandise online offer.

The online food market is currently growing at 16% and over the

next five years is set to grow by 98%. In 2011 we took an initialstep in online grocery through the acquisition of a minority stakein Fresh Direct, a leading online, fresh food retailer in New York.We established a very positive relationship with Fresh Directwhich enabled us to embed a Morrisons team into their businessfor nearly a year. During that time we developed a detailedunderstanding of Fresh Direct’s operating model and how thoselearnings could be applied to launch a successful online businessin the UK.

We have completed that evaluation and are now confident thatwe have identified a model that will enable us to provide foodonline in a distinctive, customer focused way that reinforcesMorrisons leadership in fresh food by putting fresh food at theheart of its offer. Accordingly we will be launching Morrisons

first online food offer in line with previous guidance by the endof January 2014. In order to do this, we will accelerate thedevelopment of our technology infrastructure and will furtherstrengthen our online food management team.

Convenience

New conveniencestores in 2012/13 9Target conveniencestores by the endof 2013/14

100

• Trial more convenience stores

• Open our first Kiddicare store

• Continue to develop Morrisonsonline food proposition

• Open Grimsby seafood factory

• Continue to roll out conveniencestores, particularly in the South East

• Further develop Morrisonscellar.comand other online non-food categories

• Launch Morrisons online food offerin 2014

• Opened nine convenience storesincluding a petrol forecourt andcity centre locations

• Acquired a dedicated conveniencestore distribution centre in Feltham

• Successfully opened three Kiddicarestores and our Grimsby seafood plant

• Launched wine online(Morrisons Cellar)



WHAT WE DID


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Capturing growth – continued

Growing convenience

Customers want to be able to top up onthe items they need without having totravel to their nearest large supermarket.

The UK convenience market, which is currently worth £36bn, isa huge opportunity for Morrisons. It already accounts for 21%of UK grocery sales and is expected to grow by a further 30%in the five years to 2017.

Convenience is a market that Morrisons has only recently entered.It is an outstanding opportunity to leverage our points of difference,our unique vertical integration and great fresh and value credentials,and to develop a truly compelling new fresh food experience at theheart of local communities.

In this sector it is important to develop a proposition that isflexible enough to meet the specific needs of different locations.During the year we continued to experiment with the format,opening a Morrisons M local in a petrol filling station in Doncasterand at a city centre location in Birmingham. By the end of theyear we had 12 convenience stores open, primarily in the Northof England. These stores offer a very different and attractiveshopping experience, with the same fresh food pricing as our corestores, and with half of the space dedicated to fresh food and

scratch cooking. The performance in these stores has been wellahead of our expectations and customer feedback has beenparticularly encouraging.

In February 2013, we announced that we had acquired a total of62 stores from a variety of other retailers. These will be convertedto the Morrisons M local format and will open over the course ofthe coming year. We are delighted to have acquired these stores,and as a result have increased our target for new convenienceformat openings in 2013/14 by some 40%, taking our expectedtotal at the end of 2013/14 to 100. We will be looking to increasethat number in the future.

Increasing our presence in London and the South East, wherewe are significantly under represented, is a major opportunity forMorrisons and convenience outlets have a key role to play in thatdevelopment. Increasing our convenience presence in this regionis a priority for 2013/14. After the year end we opened our firsttwo London convenience stores, in Ealing and Elm Park – theirinitial performance has been very encouraging.

We will support our expansion in London and the South East from

a 100,000 square foot distribution centre in Feltham, West London,which opened in the first quarter of 2013. In the coming year wewill be looking to acquire a new convenience distribution centre(CDC) in the north of England to support our planned growthof convenience formats in that region. Outside of the majorconurbations we will supplement this expanding CDC networkwith our unique hub and spoke distribution system.

We believe that capturing strategic growth through the developmentof multi-channel opportunities will be an important driver ofshareholder value in future years. Building these businesses hasrequired incremental revenue expenditure of £17m in the year.This will increase to £40m in 2013/14 as we accelerate theseopportunities. We also invested £40m of capital expenditurein our multi-channel operations in the year which will increase

to £150m in the coming year. This sum is included within ourprojected total capital expenditure of £1.1bn for 2013/14.


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At our Grimsby site we fillet around 10,000salmon, 10,000 cod and 10,000 haddockeach week.


Vertical integration

Vertical integration is crucialto our leadership in fresh food.

Sourcing and processing fresh food through our own facilities haslong been a key point of difference for Morrisons. In addition tothe flexibility that controlling our own supply chain brings to thebusiness, it is a true source of competitive advantage which enablesus to offer great quality products for great prices. It also enables usto have control over the provenance, safety and quality of our freshproducts. It is becoming increasingly important to consumers thatthey are able to understand and trust where their food comes from.

With half of the fresh products we sell in-store being processedthrough our own factories, Morrisons is uniquely placed to offercustomers the reassurances they seek.

In 2010, we set out our strategic objective to increase the scopeof our vertical integration by investing £200m over three yearsin additional capacity for relevant fresh categories to support ourretail operations. Since then we have expanded into several newcategories. These include fresh flowers through the purchase of

Flower World in 2011, and fresh meat packing following theacquisition of a facility from Vion Group in the first half of the year.This will enable us to extend the range of categories we producethrough Farmers Boy. In addition, we have expanded our authorityin fresh fish by establishing a seafood processing facility in Grimsbywhich is now on stream. We have also started to expand our Colneabattoir to facilitate further pork processing and are adding furthercapacity through the expansion of our bakery in Wakefield.

We have over 50 species of fishavailable seasonally.

“Morrisons own their own farm,so I can trust where the meatcomes from.”

Nicola Jones, customer, St Albans


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Our Group financial statements




Richard PennycookGroup Finance Director

Financial review

Our financial performance has continuedto be robust in difficult trading conditions.

We remain committed to investing inthe future of the business and to sharingthe benefits of our success with ourshareholders.

Financial strategy

The underlying principles behind this strategy are:• growing sales ahead of market;• delivering earnings that meet the expectations

of shareholders; and• maintaining a strong investment grade balance sheet.

We are meeting these principles by:

• growing sales organically;• converting sales growth into profitable growth; and• investing in our business to yield an appropriate rate of return.

Highlights

Cash generatedfrom operations £1.4bnGearing 42%

Capital investment,including capital expenditure,investments and acquisitions

£1.0bn

Investment in equityretirement programmeduring the year £579m

We have over 500 varieties of fruitand vegetables in our stores.


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TaxCorporation tax paid in the year was £243m. This cash outflowrepresented 50% of the total tax bill for the year to 29 January2012, and 50% of the tax for the year to 3 February 2013.

In the year the effective tax rate was 26.4% (2011/12: 27.1%)which is slightly above the prevailing corporation tax rate of 24%.This is due to a combination of non-qualifying depreciation andexpenses, for which the Group is unable to obtain a tax deductionand which has the effect of increasing the tax rate above thestatutory level. Offsetting this, the tax charge was reduced by achange in the main rate of corporation tax from 26% in the prioryear to 24%.

Our in-house tax department’s primary focus is on ensuring thatthe Group continues to pay the appropriate level of tax at the righttime. We actively engage with the UK tax authorities and aim tobe transparent in all our activities with the tax authorities in allthe territories where we have operations. The Group, which ispredominantly UK-based, operates a simple business model anddoes not engage in sophisticated tax planning structures.

Capital expenditure

The Group continues to invest in the infrastructure required tosupport long term growth. This includes building new stores, theongoing replacement of IT systems, the strengthening of supplychain, and the development of new business channels. During theperiod total capital expenditure (including acquired businesses)was £1,016m. This included £512m on new store space (including

convenience), £104m for the continuing development of ITinfrastructure and £33m on multi-channel investment.

During the period, we opened 17 new stores (a net 14 after threereplacements/closures) and nine Morrisons M local conveniencestores. We also invested in acquiring new sites to support ourplanned future growth. We extended five existing stores andrefurbished a further 71 stores to incorporate our Fresh Formatconcept. At the end of the period, we had a total of 13.4m squarefeet of net selling space, an increase of 4.0% over prior year.

At29 Jan2012

Newstores1

Storeextensions2

At3 Feb2013

Number of

core stores

472 14 5 486

Number ofconvenience stores

3 9 – 12

Total numberof stores

475 23 5 498

Total area in squarefeet (‘000)

12,904 477 40 13,421

Number of petrolfilling stations

300 13 – 313

1 Net of replacements.2 Number of store extensions is included in total number of stores.

The Chief Executive’s review on page 8 contains information aboutthe Group’s financial performance for the year, in particularturnover growth, like-for-like sales and operating profit.

Underlying profit is the measure we use to assess normal underlyingbusiness performance and trends. Earnings are adjusted to removevolatile or one-off costs and credits. A reconciliation of underlyingprofit is provided in note 1 of the Group financial statements.

Summary cash flow

2012/13£m

2011/12£m

Cash generated from operations 1,432 1,264

Tax, interest and servicing of finance (325) (330)

Capital expenditure (980) (796)

Proceeds from sale of plant, property andequipment

5 4

Acquisitions(including debt acquired)

(36) (74)

Investments – (31)

Dividends paid (270) (301)

Proceeds from exercise of share options 42 –

Equity retirement (579) (368)

Net cash outflow (711) (632)

Non-cash movements 1 (22)

Opening net debt (1,471) (817)

Closing net debt (2,181) (1,471)

Net cash outflow increased by £79m during the period in linewith our planning assumptions around capital expenditure andour equity investment programme.

Cash generated from operations

Cash from operating activities increased by £168m reflectingstrong working capital management.

Interest

As planned, our average net debt increased during the year andas a result net interest paid of £82m was higher than in the prioryear (2011/12: £49m). The Group’s effective interest rate of 4%was consistent with the prior year (2011/12: 4%). Interest wascovered 14 times (2011/12: 37 times). Excluding net pensioninterest expense (2011/12: income) interest was covered 14times (2011/12: 25 times).


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Financial review – continued

The Group maintains a rigorous capital expenditure programmeand all potential investments are required to meet prescribedhurdle rates. A post expenditure review programme is in placeand appraisals of all major expenditure projects are carried outby independent review teams. The findings of these appraisalsare reviewed by the Board regularly.

Acquisitions

During the year the Group invested £36m in extending the scopeof its manufacturing operations. In March 2012, it extended itscapability in cooked meat production through the acquisition ofthe Winsford site for £21m and acquired the remaining 49% ofFarmers Boy Deeside for £15m.

Further information on the nature of the acquisitions can be foundin note 27 of the Group financial statements.

Net debt

In line with previous guidance, net debt at the end of the yearwas £2,181m, an increase of £710m over the previous year. Thisincrease was due to a combination of increased capital expenditure,strategic investments in growth opportunities in multi-channel andmanufacturing, increased dividend payments and the continuationof our equity retirement programme.

During the year we have taken steps to increase the amountof funds and facilities available to the Group and sought to dothis in a way which extends and balances the maturity profile

of our borrowings.

In May 2012, the Group concluded a bilateral revolving creditfacility of £150m with Svenska Handelbanken AB which maturesin March 2016. Combined with the multi-bank facility concludedin March 2011, we now have committed facilities of £1,350m toMarch 2016. At the balance sheet date £675m of those facilitiesremained undrawn.

In July 2012, the Group issued a 14 year sterling bond toinstitutional investors, which provided £400m of funding throughto July 2026. In November 2012, the Group concluded a £200mterm loan with Lloyds Banking Group, which matures in May 2014.

The Group ended the year with a well diversified and maturefunding base.

Gearing

Our gearing ratio increased during the year, as planned, to 42%(2011/12: 27%). Moody’s, a leading credit agency, continuesto recognise the strength of our balance sheet.

PensionsThe two defined benefit pension arrangements sponsored by theGroup are both managed externally to, and independently of, theGroup’s operations. This year we launched our Retirement Saverscheme (accounted for on a defined benefit basis) which providesa lump sum benefit based on a defined proportion of earnings.This replaces the previous defined contribution scheme and isopen to all colleagues. We retain a prudent approach to valuingour defined benefit pension obligations.

At 3 February 2013, the schemes had a deficit of £20m.The movement, from the deficit of £11m at 29 January 2012,is summarised in the table below.

Pension bridge £m

Net pension deficit at 29 January 2012 (11)

Actuarial gain recognised 145

Actuarial loss recognised (151)

Funding above annual service cost 1

Net pension interest (4)

Net pension deficit at 3 February 2013 (20)

IAS 19 ‘Employee benefits’ requires the Group to assess the liabilitieswith reference to the market conditions at the balance sheet dateand the Directors’ best estimate of the experience expected from the

schemes. The movement in the year has been influenced by changesin assumptions due to changes in market conditions.

Scheme assets performed better than assumed returns; however,scheme liabilities increased to a greater extent due to a combinationof financial and demographic changes in assumptions. Over theyear, market conditions fluctuated significantly with corporate bondyield returns and inflationary expectations decreasing. There hasbeen no further update to longevity this year.

The Trustees will undertake their triennial valuation of the pensionschemes in April 2013.

Our strawberries are handpicked

first thing in the morning, packedin recyclable punnets and deliveredto stores within 24 hours.


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Returns to shareholdersIn March 2011, our preliminary results announcement set outour policy of maintaining a progressive dividend, whereby dividendgrowth would be in line with underlying earnings per share growth.Additionally, we confirmed that in each of the three years to2013/14 the year-on-year increase would be at least 10%.

In accordance with this policy, the Board has recommended afinal dividend of 8.31 pence per share, making the total dividendfor the year 11.80 pence per share, an increase of 10%. On thisbasis dividend cover was 2.3 times (2011/12: 2.4 times).

Payment of the final dividend will be made on 19 June 2013for shareholders registered on 17 May 2013.

2012/13 2011/12 Change

Interim dividend paid 3.49p 3.17p +10%

Final dividend proposed 8.31p 7.53p +10%

Total dividend for the year 11.80p 10.70p +10%

Equity retirement

In March 2011, we announced an equity retirement plan topurchase £1bn of ordinary shares in the market over a two yearperiod, for subsequent cancellation. During the year, £579mwas invested in this ongoing programme and 186m shares wererepurchased and cancelled, bringing the total invested under

the scheme to £947m. The programme was completed on8 March 2013.

Basic underlying earnings per share for the year was 27.3p, anincrease of 6.7% over prior year. The impact of the investmentin the equity retirement plan in the year has been to increasebasic underlying earnings per share by 4.2%.

Return on capital employed (ROCE)ROCE is the key metric behind our investment strategy and in drivingmanagement performance. In order to monitor the progress of ourcapital efficiency measures we will publish a ROCE performancefigure with our interim and preliminary results. The measure ofROCE that we have selected is calculated as:

ROCE = underlying profit before interest and rent paid, less tax

Net assets + net debt + 20 times rent payable

Despite a slight decrease this year, over the past five years wehave delivered progressive improvement in returns, which stand

well above the Group’s weighted average cost of capital.

2008/09 2009/10 2010/11 2011/12 2012/13

Adjustedunderlying profitafter tax (£m)

504 616 682 738 778

Capital employed(£m)

5,730 6,191 6,765 7,299 8,085

ROCE (%) 8.8% 10.0% 10.1% 10.1% 9.6%

Key judgements and assumptions

Judgements and assumptions made in these financial statementsare reviewed each reporting period. Whilst some outcomeshave been affected by the volatility in the financial markets,all judgements and assumptions in the accounting policies remainconsistent with previous years. Consideration of impairment tothe carrying value of assets has been made and we have concludedthat the individual carrying values of stores and other operatingassets are supportable either by value in use or by market values.The impact of the current economic conditions on the assessmentof going concern has been considered in the general informationsection of the Directors’ report.


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Colleague engagement and retention D GRiskWe are a people business and our 129,000 colleagues make it happen forour customers. If we fail to retain, develop and motivate our colleagues,we will not provide our customers with the quality of service they expec t.

Mitigation• Competitive employment policies, remuneration and benefits packages

established.• Significant investment in training and development, including Morrisons

Academy and Coaching for Performance programmes.• Regular talent reviews and refresh of succession plans to meet the future

needs of the business.• Climate and Pulse surveys undertaken to understand and respond to

colleague concerns.

Managing risks and uncertainties

Our approach to risk management

As with all businesses, we face risk anduncertainty, which could impact thedelivery of our strategy. The Board hasoverall accountability for ensuring thatrisks are effectively managed acrossthe Group, and that there is a system

for internal control. The ManagementBoard is responsible for implementingand maintaining the system of controls.

Managing the riskmanagement process

The Board believes a successful risk management frameworkbalances risk and reward, and applies reasoned judgementand consideration of likelihood and impact in determiningthe Group’s principal risks. The Group’s risks are reviewedregularly and updated as appropriate.

1. Our strategy informs the setting of objectives across thebusiness and is widely communicated.

2. Risks are identified by colleagues fro m all business areasthrough a variety of mechanisms, including facilitatedworkshops. The likelihood and impact of identified risksis considered and captured.

3. Responsibility for actions to mitigate risks is delegated toappropriate colleagues within the business, and risks and

controls are recorded in the functional risk registers.4. The Management Board considers the risks reported in

the functional risk registers and, with assistance fromRisk and Internal Audit, prepares a Group risk register.This is reviewed and approved by the Board of Directors.

Business change D E G

RiskThe Group is undertaking a number of major change programmes that willsignificantly impact existing ways of working. There is a risk that the businessfails to build the capacity and capability to support business changes resultingin service disruption or unintended costs.

Mitigation• Organisation Design structures and support established for multi-channel

and other change programmes.• Multi-channel governance structure exists including Business Design Authority.

Business interruptionD

RiskOur distribution and systems infrastructures are fundamental to ensuringthe normal continuity of trading in our stores. If a major incident occurredto this infrastructure or another key facility, this could have a detrimentalimpact on our ability to operate effectively.

Mitigation• Recovery plans exist for individual sites.• Investment in remote IT disaster recovery site and regular testing of recovery

plans for key systems.• Adherence to a stringent process for evaluating new suppliers/third parties.• Contingency arrangements documented for key suppliers.• Annual crisis simulation exercise.

Business strategy D G

RiskEffective long term management of the Group’s strategic risks will deliverbenefits to all our stakeholders. The Board understands that, if the strategyand vision are not properly formulated, communicated or implemented, thenthe long term aims of the Group may not be met and the business may suffer.

Mitigation• Strategy development led by the Chief Executive and senior management

with Main Board scrutiny and approval.• Engagement with a wide group of stakeholders to ensure the strategy

remains current.• Communication of strategy via numerous channels.• Clear link between strategic targets and business plans to drive implementation.• Close Board monitoring of business performance.

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Customer proposition D

RiskWe operate in a highly competitive industry and our customers’ shopping habitsare influenced by broader economic factors that our business does not control.If we fail to keep our proposition aligned with customers’ expectations, then theymay choose not to shop with us and sales will suffer.

Mitigation• Insight team provides data and analysis to help identify customer needs and

wants which inform product ranging, marketing, advertising and the locationof new stores.

• Regular review of positioning against competitors.

Space optimisation D G

RiskThe business is growing the size of its retail space through acquisition andby modernising and extending existing stores and facilities. If we fail to growour space profitably, we will lose market share and earnings will suffer.

Mitigation• Property strategy develops stores to a well proven format.

• Formal capital approval process, overseen by the Investment Board.

Financial and treasury D

RiskThe main financial risks that the Group is exposed to relate to the availability offunding, the loss of a financial counterparty and the uncertainty produced byfluctuations in interest and foreign exchange rates. All of these things have thepotential to undermine the Group’s ability to finance its trading activities and itsfinancial results.

Mitigation• Treasury Committee controls activities in line with Board approved policies

and procedures and reports twice a year to the Audit Committee.• Hedging and derivatives used to control risk and protect the business rather

than create profit.• Board approval of budgets and business plans.

Food and product safety D RiskIf we fail to deliver excellent standards of hygiene and safety i

annual report 2012-13 morrision

Documents