Fresh ideas from Morrison

Despite delivering record profits in 2010-11, the past year must have been frustrating for grocer Wm Morrison. True, all supermarket operators faced challenging conditions, but Morrison had outperformed for several years after its acquisition of Safeway in 2004. So, for it to be one of the weak performers over Christmas wasn't the festive surprise the City had hoped for.

The departure of Marc Bolland to Marks & Spencer and subsequent appointment of Dalton Philips as the chief executive in April also meant a transition period as the new man felt his way around the business before delivering his plans. That meant a year without full answers to questions over how Morrison could catch up its rivals in online and non-food operations, and restore some lost sparkle to its sales growth.

Mr Philips - a relative unknown whose appointment was a surprise - certainly can’t be accused of rushing to answer the clamour. An initial presentation in September outlined a plan to build on Morrison's strengths rather than launch the revolutionary initatives that might be expected from a young chief executive. Yes, he acknowledged that Morrison needs to up its game in convenience, online and non-food selling, but he was committed to nothing except small-scale trials. For analysts who worried that Morrison could be left behind in the landgrab for space in shopping centres and online, it didn't provide much comfort.

Arguably Mr Philips's cautious approach should be applauded, particularly as it means the make-or-break acquisitions rumoured by the market won't happen. Buying struggling Home Retail to bulk up non-food or the unprofitable Ocado to kick-start online grocery sales would have been expensive, requiring lots of resources to integrate with no guarantee of success.

Instead, the measured steps Morrison has taken since September's review look a better way to build a solid foundation from which the group can deliver its vision of what online retailing should look like, rather than trying to crowbar someone else's methods to fit. Kiddicare, the infant goods retailer that Morrison bought for £70m in February, may have seemed an unusual first purchase in non-food online retail, but it brings online know-how, an award winning e-commerce system and an under-used distribution infrastructure, which can form the basis for expansion into adjacent categories.

Circumventing a potentially long-winded learning process is also the rationale behind Morrison's first foray into online grocery - the purchase of a 10 per cent stake in New York-based online grocer FreshDirect. Morrison's doesn't intend to expand into the US, but will be embedding a team there to learn how FreshDirect manages to deliver fresh foods via online sales profitably. Whatever Morrison discovers, rolling out a formula in the UK will require further investment. But management stresses the model won't be as capital intensive as the highly automated Ocado.

Importantly, Mr Philips hasn't forgotten that continual improvement of Morrison's core grocery offering is vital too, especially when consumers' budgets are coming under strain. Morrison says that, when shoppers are after value, it gains market share. But it's taking no chances - it's pushing through efficiency programmes that could save over £300m a year by 2014 and allow it to keep delivering low prices to protect shoppers from rampant food inflation. It has also upped its target to open 2.5m square feet of selling space over the next three years, focusing on the south of England, where it's under represented so won't cannibalise existing stores' sales. That expansion will be boosted by another 750,000 square feet to come from using existing space better.