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How The Horsemeat Scandal Could Benefit Wm. Morrison Supermarkets plc (WRM)

LONDON — Over the last few months, Wm. Morrison Supermarkets plc (LON:MRW) has been increasingly tipped as a likely prospect — either as a value play, a recovery play, or an income play. And given its status as a defensive stock on a forecast price-to-earnings (P/E) ratio of 10, and a forecast yield of 4.9%, it’s easy to understand why.

Putting the company’s income attractions to one side, though, until recently it’s been difficult to see where exactly the upside could come from.

Tesco Corporation (USA) (NASDAQ:TESO)Yes, the business is now aggressively moving into the local convenience store market, and has picked up 49 former Blockbuster stores in the last few days. But others, such as Tesco Corporation (USA) (NASDAQ:TESO), are much further ahead. Online? Yes, Morrisons is dipping its toe into the water. But others, such as Tesco, are much further ahead. Brand extensions, such as banking, telecommunications and so on? A recent deal with Lakeland is a start — but others, such as Tesco, are further ahead. And so on.

The horsemeat scandal provides Morrisons with something of an opportunity, I believe. Here is an area where Morrisons, for once, is much further ahead of its rivals.

Let’s start with a simple quiz. Name Britain’s largest food manufacturer. And here’s the rub: thanks to its firm policy of farm-to-fork vertical integration, Britain’s largest food manufacturer is now… Morrisons. Formerly Britain’s second-largest food manufacturer, Morrisons is now top dog.

That’s right. The company owns 18 food manufacturing plants, employing 7,000 people. And that employment figure, I’d stress, excludes the people employed in Morrisons’ in-store bakeries and so on. Other companies — such as Greencore Group plc, for instance — have more employees, but not as many located purely in the U.K.

Quite simply, Morrisons buys its meat straight from the farm, sends the animals to its own abattoirs, and butchers it directly in its own stores. Critically — and here’s where some of those food manufacturing plants come in — it also supplies its own food preparation sites with meat, in order to make its own pies, sausages, cooked meats and other products.

Vertical integration
Now, that’s a very different business model from that adopted by most of its competitors. And up until the last three weeks, Morrisons has been promoting this model by extolling the benefits to farmers, better quality control, less waste and better use of resources.

But with the horsemeat scandal now breaking over even giants such as Nestle — which must, I reckon, have thought that it must have been immune from the risk — fate has handed Morrisons a marketing card that its competitors can’t quickly deploy for themselves.