STORIES BEHIND WHAT MATTERS

Online has arrived

ANNUAL REPORT AND

FINANCIAL STATEMENTS

2013/14

Wm Morrison Supermarkets PLC

STORIES BEHIND

THE ST

RA

TE

GIC REPOR

T

Yesterday I was o

n

The vine in

Norfolk

!

Yester

day I was on

Our year and our business

Business overview 4

Chairman’s review 5

Chief Executive’s review 7

Our business model 12

The market context and our strategy

The market context 16

Our strategy 18

Save 20

Invest 24

Grow 27

Relationships and our responsibility

Relationships 32

Corporate responsibility 35

Our risks and financial review

Our risks 40

Financial review 43

Corporate governance report 47

Directors’ remuneration report 59

Directors’ report 73

Statement of directors’ responsibilities 75

Independent auditor’s report 76

Consolidated statement of comprehensive income 79

Consolidated balance sheet 80

Consolidated cash flow statement 81

Consolidated statement of changes in equity 82

General information 83

Notes to the Group financial statements 84

Company balance sheet 113

Company accounting policies 114

Notes to the Company financial statements 117

Investor information

Five year summary of results 127

Supplementary information 129

Investor relations and financial calendar 130

Governance

Financial statements

Note: Throughout the Directors’ report and Strategic report: (1) Unless otherwise stated, 2013/14 refers to the 52 week period ended 2 February 2014 and 2012/13 refers to the 53 week period ended 3 February 2013. 2013 and 2014 refer to calendar years. (2) Underlying profit is defined as profit before non-recurring exceptional costs, costs of new business development, property transactions and IAS19 pension interest, at a normalised tax rate, as reconciled in note 1.4 of the Group financial statements. Underlying operating profit is operating profit before property transactions and non-recurring exceptional costs and costs of new business development. (3) Like-for-like sales reflects the percentage change in year-on-year store sales (excluding VAT and fuel), stripping out the impact of new store openings and closures in the current or previous financial year.

Strategic r epor t Go vernance Financial st atements

We provide great service to

our customers by offering the

best value fresh food, prepared

by our experts. We are unique

because of the visibility of

our supply chain and our

focus on traditional crafts –

we do more of what matters.

Left:

ONLINE ANNUAL REPORT 2014

For more information visit:

OUR YEAR

AND OUR

BUSINESS

Our Chairman, Sir Ian Gibson, and our CEO,

Dalton Philips, discuss the year and

what’s ahead for the business during 2014/15.

See page 5

Our vertically integrated business

model allows us to create value from

field to fork.

See page 12

Below:

Ant and Dec experienced firsthand the freshness of our seafood offer.

Right:

The quality of our seafood was recognised in the year at the 2013 Retail Industry Awards: we won Seafood Retailer Of The Year.

Strategic r epor t Go vernance Financial st atements

In store

All

our

fish a

re Freshly prepared...

...By our expert fishmonger

s

All

our

fish a

re Freshly p

repared...

...By our expert fishmonger

s

Go e a ce a c a state e ts Above:

Our fishmongers are on hand to offer advice and prepare fish to customer specification.

Business overview

THIS IS MORRISONS

111

113

107

95

77

4

25

11

26

36

Yesterday I was

in

A field in Lincolnshir

e

Morrisons has grown from a market stall in

Bradford to the UK’s fourth largest supermarket group.

WHO WE ARE

At Morrisons, we stand for value without compromise. We are, and always have been, a value-led grocer, British born and bred. We are focused on food, with unrivalled service and skill in producing and selling fresh food. We have our own manufacturing plants that supply our stores to ensure that we sell only the best products. Our vertical integration gives us both transparency and control over the provenance and safety of our supply chain as well as the flexibility to meet the demands of customers. We have adapted to the changing demands of our customers by launching a multi-channel approach that offers the same great supermarket experience to customers in convenience stores and online.

ONLINE

Our online delivery service now covers two areas of the UK, we will cover 50% of UK households by the end of 2014.

FRESH

Our vertically integrated supply chain and strong supplier relationships ensures only the freshest produce is sold in our stores.

customers visit stores per week

11.8m

stores across UK, of which 102 are convenience stores

605

ǐǏ

of the fresh food that we sell, we make ourselves

59% 75,000

online deliveries between 10 January and

9 March 2014

MANUFACTURING FACILITIES

We process 40% of the fish we sell in store at our Grimsby site.

Strategic r epor t Go vernance Financial st atements

A DIFFICULT YEAR AND

A STRATEGIC SHIFT

Chairman’s review

Over the past year, the grocery market has remained challenging. Consumers have had to deal with difficult economic conditions and many have been constrained financially. They have had to make trade offs in their spending, doing this through their choice of format, choice of products or simply buying less food. This was reflected in market growth slowing in the final quarter of the year.

In this environment the discount sector has performed strongly, driving much of the market growth. We believe that, unlike previous cycles, its performance is structural rather than cyclical. The rest of the market has been working hard to counter this threat, with particular emphasis on loyalty programmes and personalised couponing, areas in which Morrisons has not been able to compete effectively fully to date due to outdated IT infrastructure and systems.

Whilst these factors, and the fact that we do not yet have a meaningful presence in online and convenience, the two fastest growing channels in the grocery market, have clearly held us back, the overall performance of our core business has been disappointing. We have committed to address this through a significant and sustained investment in our proposition that underpins our determination to offer the best value, price and quality for our customers. We will reset the profit base of the business to deliver this. Details of our investment plans are set out on pages 24 to 26.

We have also described our plans to increase value elsewhere in the business in our financial strategy on page 9.

I am pleased to report that we have made considerable progress in advancing the strategic initiatives that we set out at the beginning of the year and which are laying the foundation for the long term future of our business. In particular, and over a very short timeframe, we have successfully launched our own innovative, online food proposition which will be available to half of UK households by the end of the current financial year. We have also made considerable progress in developing our convenience network and now have over 100 M locals with dedicated distribution centres serving the North West as well as London and the South East.

The Board’s confirmation of a 10% increase in the dividend for the year, in line with its stated target, and its commitment to a minimum 5% increase in 2014/15 demonstrates its confidence in the future of the business.

RESULTS

In the year, total turnover of £17.7bn was down 2% (2012/13: £18.1bn). When compared to prior year the underlying operating margin of 4.9% fell by 40bps. This increased to 50bps after adjusting for the impact of a lower proportion of fuel sales in the mix this year.

Net finance costs of £82m increased by £12m over the prior period as a result of a planned increase in net debt to accommodate our peak investment of capital expenditure.

Underlying profit is calculated after removing property disposals, new business development costs, non-recurring exceptional costs and IAS19 pension interest. Underlying operating profit of £865m fell by 11% when compared to the prior year, with underlying profit before tax of £785m, down by 13%.

Sir Ian Gibson Chairman

STRUCTURAL CHANGE

FOR SUPERMARKETS

MEANS A

STRATEGIC

Chairman’s review

A DIFFICULT YEAR AND A STRATEGIC SHIFT

CONTINUED

Supporting the

LOCAL

Community

The Group’s net debt grew, as planned, during the period, to £2,817m, (2012/13: £2,181m). Gearing increased to 60%, which has been impacted by the write down of assets. We anticipate that we will generate significant free cash flow in 2014/15 and that net debt will fall during the year to around £2.4bn – £2.5bn.

The Group continues to maintain a strong balance sheet in line with our stated principles. This is securely financed by a number of long dated bonds and by revolving credit facilities of £1,350m with our banks of which £775m remained undrawn at the end of the year. In June 2013 we increased the funds available to the Group and further improved the maturity profile of our borrowings, by issuing a €700m Euro bond with institutional investors, repayable in 2020.

Return on capital employed (ROCE) is a key performance measure for the Group and underpins our focus on capital discipline. 2013/14 marked a peak year of investment for the business and, as a result, ROCE fell to 8.4% after the effect of non-recurring exceptional costs (2012/13: 9.6%). We are committed to delivering improved shareholder returns over time.

INDUSTRY RECOGNITION

Morrisons is committed to providing its customers with great fresh products from sustainable sources, backed by unrivalled service from our own in-store colleagues with craft skills. We are delighted that this has again been recognised with a number of prestigious industry awards. These include: ‘Most sustainable retailer of the year’, ‘Seafood retailer of the year’ and ‘Fresh produce retailer of the year’ at the 2013 Retail Industry Awards and BitC’s European CSR Award. Our support for our colleagues in making Morrisons a great place to work has been recognised by the award of ‘Employer of the year’, for the fourth consecutive year, at the Grocer Gold Awards 2013.

COMMUNITY AND THE ENVIRONMENT

How we operate as a business is very important to us. We care about where our products come from, the people that make them and how products are bought, made, moved and sold. Our customers expect us to trade responsibly and we work within the communities in which we operate, to manage resources carefully whilst maintaining ethical standards. We have a number of key programmes which support our commitment. These include the Morrisons farming programme, the objective of which is to work closely with the UK farming supply base to ensure that it’s fit for the future; our Ethical Trading Code, which is incorporated into our terms and conditions with suppliers and includes payment of a living wage, non-excessive working hours and a safe working environment; GSCOP compliance; and our ‘Great Taste, Less Waste’ campaign focusing on consumer food waste.

OUR COLLEAGUES

Our industry awards were only achieved through the dedication, hard work and commitment to the cause of our 125,000 colleagues across the business who every day seek to delight the nearly 12m customers on average who visit our stores each week. I am pleased that their efforts, in what has been a challenging year for the business, have enabled them to share a profit share pool of £28m this year.

Colleagues are key to being able to fulfil our promises and providing the best service to our customers. We believe in building a healthy, high-performance culture and providing equal opportunities for all. On behalf of the Board I wish to thank every one of our colleagues for their dedication, professionalism, service and commitment to our business throughout the year.

Sir Ian Gibson

Chairman

RESULTS – CONTINUED

Exceptional non-recurring costs of £903m were charged in the year including £163m in relation to Kiddicare, a business which is no longer strategic. We will look to sell this business in 2014. £319m relates to elements of our store pipeline. Following a reassessment of their potential to meet our required investment criteria we have impaired £90m of costs to date and provided for £229m of further costs. A charge of £379m has been incurred in relation to trading stores, comprising of £330m of impairment and £49m of onerous lease provisions.

A further cut in the rate of corporation tax and the positive impact of the Group’s equity retirement programme partly helped to offset the impact of the reduction in underlying earnings on earnings per share (EPS). Underlying basic EPS decreased by 8% to 25.2p (2012/13: 27.3p) with statutory basic earnings per share of (10.2)p (2012/13: 26.7p).

As planned, capital expenditure and investments, including joint ventures, rose slightly to £1,086m, an increase of £70m (7%) over prior year. This included capital relating to the launch of our online food operation, in conjunction with Ocado. The programme also reflected an acceleration in our convenience store opening programme, further expansion of our vertical integration capacity and the conclusion of the major phase of our six year IT systems development project.

We are committed to capital discipline. New core grocery space will reduce, our IT infrastructure is close to completion and our online food business is now operational, therefore 2013/14 marks the peak of our capital investment. In 2014/15 we expect capital expenditure to reduce by around 50% to £550m. Thereafter we expect it to be maintained at a level of £400m annually.

During the year we concluded the £1bn equity retirement programme we launched in 2011 with a final investment of £53m.

Strategic r epor t Go vernance Financial st atements

Chief Executive’s review

A CLEAR VISION

& STRATEGY

TURNOVER

Total turnover in the period fell by 2% to £17.7bn (2012/13: £18.1bn). Store sales excluding fuel, but including for the first time, a contribution from our new online food business, increased slightly by 0.1%1_{. Of this,}

new store openings contributed 2.9%, with like-for-like sales decreasing by 2.8%1_{. Fuel sales fell by 6.3%}1 _{reflecting both a fall in the average}

price paid for fuel at the pump as oil prices eased during the year, and a reduction in volumes as consumers continued to manage their budgets carefully. Other sales increased by 30% to £262m (2012/13: £201m) as we developed external sales channels to absorb surplus capacity in our manufacturing operations.

With Group turnover falling by 2% and with inflation a continuing cost headwind, we have had to manage our cost base very tightly across the whole of the business. Cost control has been a key focus throughout the year, whilst continuing to ensure that we provide high levels of service to our customers throughout. In doing this we have been able to further take advantage of the efficiency opportunities afforded by the investment we have made in our IT systems. This has enabled us to improve processes significantly across the business, reducing our in-store labour costs and delivering further productivity improvements in distribution. We have successfully met our target of £300m from our efficiency initiatives over the three years to 2013/14.

New business development costs, which include the trading losses of our new channels, online and convenience as well as the losses associated with the new stores in Kiddicare, increased as planned to £66m (2012/13: £17m).

We generated £9m profits on the disposal of some investment properties. Exceptional non-recurring costs of £903m were charged in the year including £163m in relation to Kiddicare, which is no longer strategic. We will look to sell this business in 2014. £319m relates to elements of our store pipeline. Following a reassessment of their potential to meet our required investment criteria we have impaired £90m of costs incurred to date and provided for £229m of further costs. A charge of £379m has been incurred in relation to trading stores comprising £330m of impairment and £49m of onerous lease provisions.

1 _{52 weeks to 2 February 2014 compared to 52 weeks to 3 February 2013.} Dalton Philips

Chief Executive

WE ARE, AND ALWAYS

WILL BE,

A VALUE BRAND

– HELPING CUSTOMERS

BUY GREAT FOOD CHEAPLY

AND WITH EASE.

11%

Market share Convenience stores

90

opened in 2014

OPERATIONAL

highlights

107

Total stores opened in 2014

£22.85

Chief Executive’s review

A CLEAR VISION & STRATEGY

CONTINUED

MARKET

overview

Over the past year, the grocery market and consumers have continued to face challenging economic conditions. Many customers have been constrained financially and have had to choose carefully where they shopped, which products they bought and in what quantity. Personalised value is playing an ever-increasing role in consumers’ choice of store as customers seek out the best value for them.

In the year the UK grocery market grew by 3.4% and was worth £104bn. This growth was primarily driven by inflation as volume growth continued to be flat to negative. Growth fell from c.4% over the first half of the year to just under 3% in the second half, in line with a fall in inflation. Over the year the Consumer Price Index (CPI) fell from 2.7% to 1.9%, with the food and drink sector a strong contributor to this decrease.

Consumers saw a fall in real earnings and although consumer confidence improved during the year, this was driven by perceptions of the economic situation, rather than a marked improvement in how they viewed their own financial situation. As a result the family budget continued to be under pressure. This has resulted in baskets being spread across multiple formats and multiple retailers and a continuing shift in the market away from core supermarkets.

Convenience, online and the discount channels are the fastest growing sectors of the market and this trend is expected to continue. This will be reflected in changing format development as retailers look to align with ever evolving customer needs, behaviours and attitudes.

The UK online food market is worth £6.5bn today. By the end of 2014, the online grocery market is expected to grow to £7.7bn, up 18% on 2013 and is forecast to grow to £14.6bn by 2018, when it is expected to account for 7.1% of the total UK grocery market, almost double what it is today. It presents an exciting opportunity for Morrisons.

This strong growth trend is also evident in the convenience market, as shoppers adopt more of a little and often approach at the expense of big basket weekly shops. The convenience market, which is growing at 4.9%, represents a huge opportunity for Morrisons. It is currently worth £36bn in the UK and is expected to grow by 30% to £46m over the five years to 2018, well ahead of the grocery market.

The year also marked the emergence of the discount sector as a significant and growing force in the market, it is currently worth £9.5bn, up 20% over prior year. This reflects a fundamental shift in the market and one that is likely to be structural rather than cyclical. It is a challenge that we will address in 2014/15.

OPERATING

results

Like-for-like

stores Other Sales 2013/14 Total 2012/13 Total

In-store (£m) 12,990 444 13,434 13,674

Fuel (£m) 3,878 106 3,984 4,241

Other sales (£m) – 262 262 201

Total turnover (ex-VAT ) (£m) 16,868 812 17,680 18,116 In-store sales

– Sales per square foot (£) 19.20 11.50 18.78 19.84 – Customer numbers per week (m) 11.2 0.6 11.8 11.4 Customer spend (£) 22.36 14.47 21.96 22.63 OPERATING RESULTS 2013/14 £m 2012/13£m Turnover 17,680 18,116 Gross profit 1,074 1,206

Gross profit margin % 6.1% 6.7%

Other operating income 81 80

Administrative expenses (356) (336) Non-recurring exceptional costs (903) –

Property transactions 9 (1)

Operating (loss)/profit (95) 949

New business development 66 17

Non-recurring exceptional costs 903 –

Property disposals (9) 1

Underlying operating profit 865 967 Underlying operating profit 4.9% 5.3%

Left:

This year we significantly grew our convenience estate.

Strategic r epor t Go vernance Financial st atements

All you need, in one go

FINANCIAL

strategy

Morrisons business has traditionally been based on strong financial principles: conservative and prudent accounting policies, well funded pension schemes, a robust balance sheet and a strong, investment grade credit rating.

We have identified significant opportunities to generate substantial free cash flow through growth, meaningful reductions in capital expenditure, improved management of our working capital and from property disposals. We will maintain our balance sheet strength, underpinned by a disciplined approach to capital management, supported by a commitment to a strong, investment-grade, credit rating over the medium term.

CAPITAL EXPENDITURE

Our capital expenditure programme has three elements: the maintenance of our asset base, the development of our infrastructure and the growth of our new channels and manufacturing capability. The total of £1.1bn that we spent in 2013/14 represents the peak level of our capital expenditure investment and will reduce significantly in the years ahead.

Our future top line growth will be driven principally through the fast growing online and convenience channels, both of which are relatively capital-light compared to developing new supermarket space. Accordingly our investment focus in future will be on these channels. We will only acquire new supermarket sites in exceptional circumstances. As a result of these measures, our requirement for capital expenditure has been reduced significantly from its current year level of £1.1bn, and from previous guidance, to £550m in 2014/15, reducing to around £400m annually thereafter.

WORKING CAPITAL

Our ongoing investment in upgrading IT systems across the whole business continues to progress and will provide significant opportunities to optimise our control of working capital, particularly in relation to inventory and the management of our supply chain.

We’re continuing to open

convenience stores,

develop

our online capabilities

and

do more of what matters

to help our customers.

Chief Executive’s review

A CLEAR VISION & STRATEGY

CONTINUED

PROPERTY

Morrisons property portfolio has an estimated market value of around £9bn. Over 90% of our core estate is freehold, a considerably greater proportion than our major competitors. As indicated at our Interim Results we have been reviewing opportunities to manage our property portfolio more actively than we have historically, in order to release surplus cash whilst improving shareholder returns. This review has been undertaken on the basis that we will:

Övalue the clear control and flexibility benefits associated with freehold ownership of stores;

Öretain an overwhelmingly freehold position in our core estate – strongest in the sector;

Ömaintain a strong, conservative and prudent capital structure; and

Önot change the risk profile of the Company.

It is expected that the freehold element of our core estate will not fall below 80%, the highest ratio in the sector.

In line with these criteria we plan to monetise some £1bn of property value by 2016/17. We will do this principally through the disposal of our non-core assets, our development assets, our newer distribution assets and our investment properties including, in a small number of cases where it makes sense to do so, the associated stores. We expect to realise £400m – £500m of disposals in 2014/15.

SHAREHOLDER RETURNS

The current year is the final year of a three year commitment, made in March 2011, to provide a minimum annual dividend increase of 10%. The Board’s confidence in Morrisons strategic direction and the long-term prospects of the business is reflected by its commitment to a progressive dividend policy, moving to two times cover over time. This is underpinned by a commitment to a minimum 5% increase in 2014/15.

CAPITAL ALLOCATION

At our Interim Results announcement in September 2013 we set out a framework by which we would allocate capital within our business. Our first priority is to invest to support our estate and infrastructure and to reduce our cost base. Thereafter we will seek to maintain debt ratios which support a strong investment grade credit rating, before investing in profitable growth opportunities and paying dividends in line with policy. Any capital which is surplus to these requirements will be returned to shareholders over time.

We anticipate that the combination of a reduction in capital investment, improvements in our working capital and an active property estate management programme as set out above, will lead to the generation of significant free cash flow. Subject to our commitment to an investment grade credit rating over the medium term, this will be returned to shareholders in an appropriate form, to be determined at the start of each financial year.

Our balance sheet is strong. We have a valuable real estate portfolio, which provides great flexibility to the business. We will realise value from our property portfolio, whilst retaining a significantly higher freehold mix than our peers. We have substantial free cash flow generation opportunities. Overall, we expect to generate £2bn of free cash flow in the three years to 2016/17.

Morrisons property portfolio

has an estimated market

value of around £9bn.

Over 90% of our core estate

is freehold, a considerably

greater proportion

than our

major competitors.

Strategic r epor t Go vernance Financial st atements

£

Local

STRATEGY

Our vision is to be a multi-format, multi-channel grocer. We are, and always have been a value-led grocer. We are committed to consistently low prices, great fresh food quality with friendly, skilled service at the heart of our business.

Morrisons is different; building on our unique heritage we provide a distinctive fresh food offer to our customers based around our craft skills and our vertically integrated manufacturing business. These differences set us apart from all our competitors and position us to succeed. We constantly seek to improve the way we do business, doing more of the things that matter for our customers: making outstanding fresh food, offering outstanding service and delivering great value.

We also seek opportunities to develop the business profitably through new formats, channels and categories, to meet the evolving needs of our existing customers and to attract new customers.

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

OUR

convictions

Ö

Value is forever

Ö

Food focused not generalist

Ö

Experiential over purely functional

Ö

Skills not just drills

Ö

General merchandise – clicks not bricks

Ö

Multi-format and multi-channel

Whilst these convictions, which form the basis of the business we are building today, are as relevant now as when we first set them out in 2012, the grocery market is undergoing a structural shift. The online and convenience channels continue to grow rapidly and the discount sector is expanding at pace, core supermarkets are under pressure.

We will address these challenges. Our strategy to compete in this intense market is to invest significantly in our core value proposition whilst accelerating our presence in the online and convenience channels.

Dalton Philips

Chief Executive Below:

In 2014/15 we will respond to the changing market place by reinforcing our core proposition.

Above:

Our vision is to be a multi-format, multi-channel grocer.

WHAT WE DO

Our business model

We are the only leading UK grocer that can claim a

business model that is involved from field to fork.

Morrisons is different because we make many of the products that we sell either in store or via our own manufacturing sites. We effectively own, operate and control a greater proportion of our fresh food supply chain than is typical for major grocery retailers in the UK.

We make more than half of the fresh food we sell in store every day, which means we are the second largest fresh food manufacturer in the UK. Food made by us is sold in our core and convenience stores as well as online.

We are able to buy direct from farmers and suppliers and utilise more of what we buy in our own abattoirs, manufacturing and processing sites. We buy whole animals and have the capability to process whole crops. By having a greater degree of control over more of our fresh UK food chain, we are able to drive efficiency through flexibility from farm gate to our customers. Our operation also benefits from a waste perspective.

We have qualified butchers, bakers and fishmongers in our stores, adding flexibility to the shopping experience, enabling customers to:

Ötailor their meat and fish to suit preferences;

Öbuy freshly baked goods each day; and

Öpick up hot food to go, offering a convenient, high quality alternative to cooking at home.

Our logistics operation is vital to our supply chain, giving us flexibility in how we move products from suppliers to distribution centres and from our food manufacturing sites to our stores. This ensures greater control over freshness, cost efficiencies and carbon management. Our scale of operation allows us to reduce costs and increase efficiency throughout our supply chain. Significant improvements have helped us to drive carbon reduction initiatives including environmentally efficient distribution centres, vehicle fleet maintenance to maximise fuel efficiency and double-decker trailers to improve carrying capacity.

We operate seven regional distribution centres servicing our core supermarkets, plus two convenience distribution centres. Our fleet consists of more than 2,300 tractors and trailers that cover over 100m kilometres per year.

Morrisons.com home deliveries are supported through our service agreement with online retailer, Ocado. This allows us to use technology and distribution operations that are first class, thoroughly tested and adaptable so that they can be rapidly expanded. The channel is supported by our state of the art Customer Fulfilment Centre in Dordon.

We work with suppliers from across the globe to source the best products for our customers.

We pride ourselves on buying as much fresh food in the UK as we can. For example, we have a strong connection with British livestock farmers and longstanding relationships with our suppliers. Some 95%* of all of our fresh meat purchased is British sourced. Supporting sustainable supply chains through purchasing is a significant part of our commitment to responsible business. Where we are able to influence the supply chain, we do so by balancing economic, environmental and social considerations as well as the interests of our customers, shareholders and suppliers. For example, our external suppliers are required to abide by our Ethical Trading Code, adhering to responsible working practices. To ensure our high quality standards are being met we have developed our own Morrisons Manufacturing Standard. The majority of suppliers who provide products for the Morrisons brand have been audited against the Standard to ensure the quality of what we offer our customers in store.

We

make

things

Or we

buy

things

Then we

move

them

HOW

we create value

Strategic r epor t Go vernance Financial st atements

ţƉHƊ+

Lƅ

ǓKůV

ţƉ2PIƀ(OšƋ2ţRƉ.

And

sell

them in

our stores or online

In our core stores, we provide a distinctive shopping environment, showcasing our fresh credentials, the food we make and the talents of our colleagues.

We sell our products in a responsible way. For example, by introducing store efficiency projects we have significantly reduced operational emissions across our estate. Our distinctive customer experience extends to our convenience and online channels as well.

Our product range includes Morrisons own brand ranges, giving the customer the flexibility to choose the right products to suit their needs at a price that is right for them. Through ongoing product reformulation, the provision of clearer nutritional information and strong promotions, we are also helping customers to make healthier choices. Our convenience stores also showcase the Morrisons difference. We have created a convenience shopping experience that captures the benefits of our vertical integration capability. Leveraging our core strengths, we have developed a proposition that tailors stores to meet local needs, with 50% of sales space dedicated to fresh food, with a price leading proposition.

Our online grocery business combines our expertise and experience in fresh food with industry-leading technology and logistics. The channel will reach 50% of UK households by the end of 2014. Our virtual craftsmen and women provide our online customers with the same high standards of fresh preparation they would get in our stores, and our doorstep freshness check is a first in the UK market.

When we get this right,

our shareholders

are rewarded, our customers enjoy a great

shopping experience

that offers value

for money,

and our COLLEAGUES are productive,

secure and happy.

Read about the key relationships that underpin our business model

See page 32

HOW

we are different

Fresh

Controlling food provenance, safety and quality.

Ö Monitoring to our standards

Through our Ethical Trading Code and Manufacturing Standard.

Ö Prepared by us

Making more fresh food than any other supermarket.

Ö Efficiencies through our operation

Getting food onto our shelves fresher and faster.

Value

Our vertical integration model allows us to take cost out of the supply chain to pass on to customers.

Ö Honest, clear pricing

Transparent promotions and clear shelf edge pricing giving our customers flexibility.

Ö Quality

If a customer is not 100% satisfied, neither are we. We offer refunds and replacements on products prepared by us.

Ö Reducing our waste

Buying whole animals and crops direct from farmers and processing through our own operations eliminates needless waste.

Service

HOT customer service provides enhanced perception, engagement and loyalty.

Ö Skilled colleagues

Investing in our colleagues allows us to deliver excellent customer service, providing continuous development and improvement.

Ö Innovation

Our multi-channel, multi-format offer is tailored to give a unique customer experience, reinforcing our fresh credentials.

Ö Availability

In store, our operation allows us to react quickly and efficiently to customer needs, catering for local demand.

THE MARKET

CONTEXT

AND OUR

STRATEGY

Understanding our marketplace is vital

to developing our plans for the future

of the business.

See page 16

We have three clear strategic objectives,

which ensure that we continue to

grow and create value for stakeholders.

See page 18

Above:

Over 50% of sales in our M local stores are from fresh and chilled products.

Strategic r epor t Go vernance Financial st atements

Mult

i-cha

nnel has arrived

Above:

Our online service is already covering 20% of UK households.

Below:

We aim to carve out a clear position as a value-led grocer focused on fresh food, with friendly service.

CHALLENGING

CONDITIONS

The market context

CUSTOMER SENTIMENT

THE MARKET

GROCERY MARKET SALES GROWTH 2013

Source: Kantar 4we Till Roll Growth (Total Grocers) 7% 6% 5% 4% 3% 2% 1% 0% 3 MAR

2013 31 MAR 28 APR 26 MAY 23 JUN 21 JUL 18 AUG 15 SEP 13 OCT 10 NOV 8 DEC 5 JAN2014

CUSTOMER CONFIDENCE

Source: GfK NOP consumer confidence 20 10 0 –10 –30 –20 –40 –50 –60 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Overall index Economic situation Personal finances

MARKET GROWTH DRIVEN BY

Source: Kantar 52we 2 February Till Roll Growth (Total Grocers) Discounters

All others

INFLATION VS EARNINGS

Source: Capital Economics – December 2013 6% 5% 4% 3% 2% 1% 0% 2004

*Average weekly earnings, excluding bonuses, 3 month average % YOY

Earnings % YOY* CPI inflation

2005 2006 2007 2008 2009 2010 2011 2012 2013

CONSUMER CONFIDENCE INDEX

Consumer confidence started 2013 at a relatively low point but improved through the year. In January 2014 46% of consumers were expecting to cut down on eating out and 31% on holidays, which compares to 53% and 38% a year earlier. However the trend has not been reflected in food shopping where the proportion that expects to cut back has remained at around 23%. Although overall consumer confidence improved, there wasn’t such a marked improvement in how people viewed their personal financial situation, implying that any recovery in market growth is likely to remain fragile.

INFLATION AND EARNINGS

Despite improved confidence in the economy and a fall in the rate of unemployment, falling real incomes remained a drag on personal finances and the growth of consumer spending. Inflation continued to outstrip earnings growth during the year, as it has done for the past four years. Households therefore continued to be worse off. Inflation has also been the main driver in market growth as total volume continued to be flat to negative. In January 2014 we launched a campaign to nail down prices to help ease the pressure on customers’ spending.

CHALLENGING CONDITIONS

Over the past year, the grocery market1 _{and its consumers have}

continued to face challenging economic conditions. Many customers have been constrained financially and have had to choose carefully which store to shop at, which products to buy and in what quantity. Customers remain cautious about the future, which adds to the necessity to limit their current spend. This has resulted in growth slowing from 4% over the first half of our financial year to 2.9% in the fourth quarter. We expect customers to feel pressure on their real income for some time.

MARKET GROWTH

Within the market, the discounters are now taking a bigger proportion of sales, driving much of the growth. On average they drove over a third of total market growth through the year.

The market has been working hard to counter this threat, with particular emphasis on couponing activity, which some of our major competitors are able to tailor to targeted consumer groups. We believe that personalised couponing will continue to feature in the marketplace and will launch a Morrisons card during the coming year.

Strategic r epor t Go vernance Financial st atements

SHOPPER TRENDS

MULTI-CHANNEL AND TECHNOLOGY

ǐ

ǐ

ǒ

Ǔ

MOST IMPORTANT DRIVER OF PRODUCT CHOICE

QUALITY PRICE

Sep 2012 Sep 2013 Source: IGD ShopperVista

ǐ

Ǒ

ǒ

Ǔ

WILLINGNESS TO PAY EXTRA FOR...

QUALITY ASSURANCE STANDARDS LOCALLY PRODUCED ITEMS

Sep 2012 Sep 2013 Source: IGD ShopperVista

USE OF ON THE SPOT PRICE COMPARERS

QUALITY

2010 2013

9%

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PERCENTAGE OF PEOPLE WHO COMPARE PRICES/PROMOTIONS ONLINE BEFORE PURCHASING

Source: IGD ShopperVista

1 _{IGD UK Channel Forecast 2013–18.}

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VALUE

Consumers continue to look for ways to manage their outgoings and adapt their lifestyles. Value for money continues to be of increasing importance. Whilst price is a key factor when assessing value, quality has also risen up the consumer agenda this year following the horsemeat scandal that affected many of our competitors.

Customers state that they are willing to pay more for quality assurance standards and locally produced items. No horsemeat was found in Morrisons manufactured products and our vertically integrated supply chain means we can give customers confidence in our produce.

ONLINE

Technology is becoming more and more important in all elements of customers’ lives, and continues to grow in importance to retail. Consequently, online sales continue to increase rapidly; by the end of 2014, the value spent in the online grocery market is expected to grow to £7.7bn, up 18% on 20131_{. This is an opportunity in which we can now}

share, following the launch of our online offer in January 2014. As well as being able to shop online, shoppers’ interest is also increasing in digital tools that help them to compare prices and promotions.

CONVENIENCE

Multi-channel shopping has become the new norm for the majority. Shopping around across channels and stores allows customers greater flexibility in managing their spend. Consumers are shopping around more frequently, adopting a ‘little and often’ approach.

The convenience channel continues to benefit from this, and is another big growth area with the convenience market expected to be worth £37.7bn by the end of 2014, a growth of 6%1_{. It’s an area we are rapidly}

expanding into.

CHANNEL SALES GROWTH 2013 – 2018

STRATEGY

Our strategy adapts to respond to ever-changing market conditions. See page 18

Convenience

Online

Our strategy

OVERVIEW

Strategic objectives

What we said we would do

£

EFFICIENCY SAVINGS Deliver £100m of efficiency savings per year for three years

See page 20

FORECASTING SOLUTION

Roll out the supply chain forecasting solution to more depots

See page 21

W

Increasing efficiency

W

Driving savings in indirect procurement

W

In-store productivity

W

Revamping our systems

W

Accelerating our future opportunities

1

Save

W

Getting closer to our customers

W

Investing in our core proposition

W

Colleague engagement

2

Invest

W

Accelerating our presence

in new channels

3

Grow

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

See page 25

CONVENIENCE Have 100 convenience stores open by the end of 2013/14, focusing on the South East

See page 28

ONLINE Launch Morrisons online food offer

Strategic r epor t Go vernance Financial st atements

What we did

What we will do next

Ö

Expand our online food proposition, reaching 50%

of UK households by the end of the year.

Ö

Open up to 100 M local stores.

Ö

Complete the roll out of IT systems in our store

support and buying teams.

Ö

Continue to drive efficiency throughout our

end-to-end operations.

Ö

Leverage our vertical integration further.

Ö

Deliver further savings in indirect procurement

and losses.

Ö

Invest more in value, particularly in fresh.

Ö

Improve our own brand offer through sourcing

and supply review.

Ö

Trial targeted and personalised communication

and launch a Morrisons card.

Ö

Open 350,000 square feet of new store space.

ǐ

Now trading 102 convenience stores;

50% in the South

Launched our

food online proposition Over 80,000 registered customers in Yorkshire and Warwickshire Opened two dedicated

distribution centres to support convenience

Serving over 500,000 customers in M local stores every week

ǐ

ǔǏ

2

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Rolled out Fresh Format to 100 existing

and 17 new stores

Launched our Nutmeg clothing

range in 214 stores

Participation in colleague engagement survey

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Own brand products launched since the start

of the programme

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£300m three-year target

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Rolled out supply chain forecasting to 90% of our ambient suppliers

Store hours saved

Our strategy

WHAT WE’VE DONE

AND WHAT’S NEXT

KPI Waste to landfill reduction

DEFINITION

Measured as waste from our stores that we are unable to recycle or have processed, expressed as a percentage of total waste compared with the prior year.

%

2012 2013 2014 5.6 3.2 2.0

KPI Carbon footprint reduction

DEFINITION

Our carbon footprint includes energy, waste, refrigeration and transport for our stores, offices, manufacturing and packing facilities.

%

2011 2012 2013 2014 12.0 14.6 19.3 24.2

INCREASING

efficiency

As our Evolve programme completes, we are able to leverage technology to accelerate the rate of productivity improvements within the organisation. We constantly look for better ways of working, removing unnecessary costs in the context of our guiding principle that great customer service and value is core to our business, and our customers. We need to take cost out of our business continually, the essential self help we need to reinvest for the benefit of our customers, to meet the structural cost headwinds we face and to support earnings growth. We have a good track record and have made great progress during the year. We have exceeded the £300m cost savings target we set out to deliver through three key initiatives.

DRIVING SAVINGS

in indirect procurement

Our indirect procurement programme was established in 2011 to help us reduce the cost of the goods and services we use in our business whilst ensuring that our customers were not affected by the process. In this exercise our colleagues have been extremely supportive by helping us identify areas of significant opportunity.

The programme involves reviewing every area of spend in the business, both revenue and capital expenditure, looking for ways to sensibly reduce cost, including the use of e-auctions, rate negotiations and consolidating spend. Some of the initiatives, such as improved property maintenance, consolidated energy savings and the purchase of consumables, were significant. Others, including changing the specification of till rolls were smaller, but they have all contributed.

Over the three years to 2013/14 we have generated savings in excess of the £100m target that we set at the inception of the programme.

1

Save

W

Increasing efficiency

W

Driving savings in indirect procurement

W

In-store productivity

W

Revamping our systems

Strategic r epor t Go vernance Financial st atements

IN-STORE

productivity

In our stores we have automated our cash office processes, removing the need for manual counting at the checkouts and streamlining our back office processes. Our ‘First Class Filling’ initiative has enabled us to replenish our shelves quickly and easily by moving many tasks outside of trading hours. We also implemented new technology on most of our tills that has reduced the overall checkout transaction time. A further significant change to a long established process was the introduction of an electronic order pad that allows colleagues to place orders via a tablet, which has replaced paper based systems in all our stores.

We will also be updating and improving our merchandising in our stores, including using more bulk pallets and merchandise display units for high volume items, as well as optimising replenishment. Individually each of these initiatives, and the many others we have implemented, delivers a relatively small benefit – in aggregate they are significant. We have exceeded our target of delivering £100m of benefits in the three years to 2013/14.

REVAMPING

our systems

For the past six years, we have been engaged in a major IT investment programme to replace our legacy IT systems with industry-leading software capability. It has been a challenging process affecting every aspect of our business. We have managed it carefully through a comprehensive Board level governance process, to ensure that we identify and mitigate risk. As we come to the end of this long journey we are delighted with the improvements that this programme has brought to our business.

The prime focus for the past year has been on planning and forecasting with the introduction of new tools. The solution replaces legacy systems for the management of the warehouses, updates core systems for the management of product information and implements new systems to enable electronic communication with our suppliers.

This technology has provided us with the ability to track stock at every stage during its journey through the warehouse, improving accuracy and enabling better service to our stores. We also concluded the roll out of new systems for meat manufacturing in our Spalding and Colne sites. These have resulted in an improvement in manufacturing yields, traceability and compliance whilst realising significant efficiency improvements.

This comprehensive and business transforming project has exceeded our initial expectations. More importantly it has provided us with an outstanding IT infrastructure, that will allow us to drive even more efficiencies into the business in the years ahead and we will soon be in a position to decommission our legacy IT systems.

The Evolve programme is largely complete and the expected benefits have been delivered. We now have a platform to build from and accelerate the delivery of further benefits.

7KLV\HDUZH

DELIVERED annualised

efficiency savings

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Left:

In-store order pads have replaced paper based systems.

Our strategy

WHAT WE’VE DONE AND WHAT’S NEXT

CONTINUED

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1. IMPROVING OUR END-TO-END OPERATIONS 1.1 Leveraging vertical integration

We are the second largest food manufacturer in the UK. In the past three years we have invested over £200m in expanding and modernising our manufacturing operations and now have outstanding facilities across many categories. Our leadership in fresh food is based firmly on our vertical integration. Sourcing and processing fresh food through our own facilities has long been a key point of difference for Morrisons. In addition to the flexibility that controlling our own supply chain brings to the business, it is a true source of competitive advantage which enables us to offer great quality products at great prices. It also enables us to have control over the provenance, safety and quality of our fresh products. The flexibility we have also allows us to support our growth in the online and convenience channels through the delivery of dedicated products directly into those channels.

It is becoming even more important to consumers that they are able to understand and trust where their food comes from. With over half of the fresh products we sell in store being processed through our own factories, Morrisons is uniquely placed to offer customers the reassurance they seek.

In recent years we have invested to improve the quality and to broaden the scope of the food we process. During the year we further established our new seafood processing facility in Grimsby, expanded our Colne abattoir, added further capacity through an expansion of our bakery in Wakefield and opened a modern banana ripening facility in Boston. We will look at further opportunities to broaden the scope of our activities by expanding into new and relevant categories in the coming years. We will also build on the success we had in the year by seeking to generate further external sales across our manufacturing operations, utilising available spare capacity.

As a result of the investments we have made in our manufacturing facilities in recent years, we now have the capacity that will enable us to transfer low value adding processes, which are currently carried out in our stores, back into our manufacturing operations, saving costs and allowing our customer-serving colleagues to do what they do best – serve customers.

ACCELERATING OUR

future opportunities

Looking forward we have clear opportunities across the business to accelerate this process in the years ahead and make us fit for the future. Utilising the significant systems capability we now have we will accelerate our self help programme to realise £1bn of savings over three years, focusing on three key areas:

1. Improving our end-to-end operations

2. Indirect procurement and loss prevention

Strategic r epor t Go vernance Financial st atements

1.2 Product flow and processes

The bulk of our productivity improvements to date have concentrated on our core estate. Utilising our new systems, we believe there are further opportunities to review our end-to-end productivity all the way from supplier to store, which will also support the continuing development of our multi-channel, multi-format operating model.

To improve our overall product flow we will build on the successful introduction of electronic order pads, a process that was completed in the year. We will further simplify that process to display products in shelf order and increase the number of lines that are automatically re-ordered. By 2017 we’ll move to sales based ordering to increase availability and accuracy and increase the centralisation of stock in our network. We will also take a different approach to how we operate in store, replacing manual scheduling with dynamic allocation of hours to more accurately reflect changing trading patterns throughout the day. We’ll also introduce improvements at our checkouts and enhance the ease, service and shopping experience in our stores.

Across vertical integration and product flow processes, we expect to generate a total of £300m of savings from improving our end-to-end operations over the next three years.

2. INDIRECT PROCUREMENT AND LOSS PREVENTION

The investment we have made over the past few years in developing our IT systems, has provided us with the essential tools we need to be able to build further on the savings we have generated from indirect procurement in recent years. We have an experienced, specialist procurement team in place who will continue to focus rigorously on all areas of cost.

In addition, tackling losses in our stores is an area in which we will deliver further major savings. Losses today, including retail shrink, waste and markdown cost us around £450m annually.

Over the three years to 2016/17 we plan to deliver savings of £200m from these activities.

3. PROMOTIONAL INVESTMENT AND SOURCING

The new systems-enabled tools we have will enable us to be far more focused on how we allocate our promotional spend so that it is invested where it can make a real impact. The tail of promotions that don’t add incremental benefit will be cut and we will cut duplicative deals, simplifying the shopping experience for our customers. The number of promoted items will be reduced by 10%.

Over the next three years we will simplify our range and reduce it by 20%, making it even easier for customers to find the product they want. Carrying fewer lines will simplify our operation, reduce our end-to-end supply chain costs and drive increased volume for our suppliers. We will work with our key branded suppliers through our M Partners programme, to drive improved category management. In addition we’ll use our dedicated own brand sourcing team to work directly with our suppliers, optimising price and quality across our range, a process we’ve already started.

In total we expect these commercial initiatives to deliver £500m savings over the next three years.

Right:

We will expand our product protection on high risk lines.

Over the next

three years

we plan to realise

£1bn of savings.

Our strategy

WHAT WE’VE DONE AND WHAT’S NEXT

CONTINUED

GETTING CLOSER

to our customers

The grocery market is changing structurally and we need to change with it, adapting our offer to meet this change head on. We are making good headway in developing our new online and convenience channels. In 2014/15 our focus will be on our core grocery offer, seeking to re-establish our value leadership with a significant investment in our customer offer. We will provide the additional ‘oxygen’ we need by taking cost out of our business, rebalancing the way we invest across promotions, personalised vouchers and shelf-edge prices to increase our value credentials and by working with suppliers through our M Partners programme.

In 2014/15 we will invest to reinforce our position as a value-led fresh food grocer. We will give more consistent value to our customers through significant investment in our shelf-edge prices, rebalancing our investment in price and promotion – primarily in fresh and brands. We will lower our prices permanently whilst running fewer, but punchier promotions.

INVESTING IN

our core proposition

We will utilise the benefit of the self help opportunities we have to strengthen our business and reinforce our position as a value-led fresh food grocer.

LOWERING PRICE ON A PERMANENT BASIS

Our customers want great value for money. We will therefore make a significant investment in permanently lowering our prices, reinforcing our position as a value-led fresh food grocer. This process has already started with our core fresh Market Street categories, where we are leveraging our vertical integration to significantly cut prices on key produce lines. Alongside our investment in fresh, we will also reduce prices on our core grocery lines to make our offer really competitive.

FEWER, MORE IMPACTFUL PROMOTIONS

Promotions are important for our customers and we will deliver a more compelling promotional package; cutting confusing and duplicative promotions and investing in fewer, deeper promotions that create excitement and drive footfall. We will support this through our manufacturing capability with outstanding and consistent deals across Market Street.

2

Invest

W

Getting closer to our customers

W

Investing in our core proposition

W

Colleague engagement

We will invest

in strengthening

our business over

the next three years.

Strategic r epor t Go vernance Financial st atements

KPI Underlying profit

DEFINITION

Measures the normal underlying business performance. Profits are adjusted to remove non-recurring exceptional costs, costs of new business development, property transactions and IAS 19 pension interest. A normalised tax rate is applied. A reconciliation of underlying profit is provided in note 1.4 of the Group financial statements.

£m

2011 2012 2013 2014 869 935 901 785

KPI Underlying basic earnings per share

DEFINITION

The EPS measure uses underlying profit, as defined above, divided by the weighted average number of shares in issue at the year end date. A calculation is provided in note 1.5 of the Group financial statements.

pence

2011 2012 2013 2014 23.0 25.6 27.3 25.2

KPI Like-for-like sales

DEFINITION

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

%

2011 2012 2013 2014 0.9 1.8 (2.1) (2.8)

MAKING OWN BRAND A COMPETITIVE ADVANTAGE

Over the last two years we have been engaged in a comprehensive and category wide programme to establish an outstanding range of own brand products. By the final quarter of 2013 that programme had been completed with over 10,000 products launched and we now have a range that is recognised and valued by our customers and is one that we are really proud of. Own brand penetration of our sales mix has increased through the life of the programme and now accounts for some 49% of our total sales in store, up from 47% when the re-launch process started in 2011. With own brand participation continuing to grow in the UK market and it being a strong driver of value perception, there is still more to do. The market is continually evolving along with customers’ perception of value and the differences between the tiers are becoming blurred; customers now expect an improved balance between value and quality. Looking ahead therefore we will simplify our range, reduce the number of products in our mid-tier brand, reduce excessive pack variants and varieties making it more productive as well as easier for customers to shop. We will also re-engineer and invest significantly in our value proposition, offering good quality at truly great prices, making our own brand range a source of competitive advantage.

IMPROVING PRODUCT QUALITY, MAKING OUR STORES EVEN EASIER TO SHOP

Our great, fresh quality food is a key strength of this business.

Further investment in our chill chain, combined with our improvements to product flow and range reductions will drive higher volumes, leading to even better availability, longer shelf life, and better quality.

Our store environment is a fundamental point of difference for us. In our Fresh Format stores we have dramatically increased the visibility of our fresh food proposition. There are, however, areas where we can do more and which matter to our customers.

Right:

We will make our stores even easier, more pleasant places to shop.

Our strategy

WHAT WE’VE DONE AND WHAT’S NEXT

CONTINUED

KPI Capital investment

DEFINITION

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

£m

2011 2012 2013 2014 592 901 1,016 1,086

KPI Net debt

DEFINITION

The Group’s overall debt position at the year end. A summary of net debt is provided in note 6.4 of the Group financial statements.

£m

2011 2012 2013 2014 817 1,471 2,181 2,817

KPI Colleague engagement

DEFINITION

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

Note: The KPI measurement method has been changed this year from mean scores to % positive. The prior year data has been restated to reflect this.

%

2012 2013 2014 68.4 72.9 71.8

LAUNCHING A MORRISONS CARD

For many years we have been at a significant disadvantage to our competitors because of a lack of IT systems capability, an essential prerequisite to really understanding customers at an individual level. We will be able to match our competitors in offering our customers tailored offers.

We do already have a loyalty scheme, Morrisons Miles, which rewards over five million of our customers who buy fuel from us. This year we will start to leverage that asset, by registering our Morrisons Miles customers. The bigger opportunity lies in the 12m customers who shop with us in store. Getting to know them – who they are and what they want – will enable an even greater opportunity to focus where we invest. We now have the necessary systems capability and have commenced trialling a distinctive and customer-focused Morrisons card, which we expect to roll out before the end of the 2014/15 financial year. This is an outstanding opportunity to interact with our customers and will enable an even greater step change to the way in which we invest in our commercial proposition.

FOCUSED AND CONSISTENT COMMUNICATIONS

This year we will focus our communication on our substantially low prices and stunning promotions. We’ll link that communication to the Morrisons brand, so that it’s clear what we offer beyond price and promotions. Great value, supported by unrivalled service and skill in producing and selling good quality fresh food – value without compromise.

COLLEAGUE

engagement

Colleagues are key to being able to fulfil our promises. We want our colleagues to be engaged with the business in order to provide the best service. This is supported through a variety of training and development programmes, described further on page 32.

We measure colleague engagement through our Climate and Pulse surveys and participation in the year was consistently high at 93% (2013: 94%). We also won Employer of Choice for craft skills, having 6,000 retail apprenticeships on offer. Colleague engagement is discussed further in the Relationships section on page 33.

Left:

In 2013, for the fourth consecutive year we won the Grocer Gold ‘Employer of the year’ award.

Strategic r epor t Go vernance Financial st atements

KPI UK grocery market share

DEFINITION

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

%

2011 2012 2013 2014 12.8 12.8 11.8 11.4

ACCELERATING

our presence in new channels

ONLINE: FOOD

Having spent two years building up our management expertise and researching the market in depth, including acquiring a small stake in Fresh Direct, we announced in July 2013 that we had entered into an agreement with Ocado to launch our own distinctive online food offer, utilising their technology platform. This partnership route, with an established industry leader, has enabled us to move quickly towards fulfilling our ambition to be a true, multi-channel, food retailer.

Using the best technology and logistics operation in the sector, we’ve created Morrisons.com – an innovative and distinctive value offer, with fresh food at its heart. We achieved this far earlier than would have been possible had we elected to develop our own solution in-house, and with much less execution risk.

The first deliveries were received by our customers in Warwickshire in January 2014, just seven months after we concluded our agreement. Feedback from our new customers has been extremely positive and trading to date has surpassed our initial expectations. Utilising our unique craft skills and manufacturing capability, we’ve taken Market Street online, providing our customers with a distinctively Morrisons experience combining our expertise in fresh food and craft skills with the best in technology and logistics.

We differentiate our fresh offer, just as we do in store, addressing our customers’ demand for freshness by offering an expert review quality rating and by allowing them to check the freshness of products on their doorstep, before accepting them.

This is one of many learning points from our association with Fresh Direct, a leading, New York based, online food business, in which we took a stake in 2011. We have learnt a huge amount from this association and have incorporated many of their concepts into our new food online proposition. With an experienced management team in place and Morrisons.com now successfully launched, we no longer need to retain this investment and will therefore dispose of it at the appropriate time. Our online operation will help us to serve more customers than ever before, and will enable us to access areas in which we are under-represented today, such as London and the South East. We are already operating in Warwickshire and Yorkshire and are on track to meet our target of being able to serve around half of all UK households by the end of 2014/15. During the year we will trial an innovative ‘click and collect’ format.

3

Grow

W

Accelerating our presence in

new channels

Below:

We are very encouraged by our customers’ reaction to our new online service.