By Kristy Dorsey

Morrisons has warned that industry-wide price increases are on the horizon as supply chain disruptions drive commodity and freight costs higher.

In what looks likely to be its last results statement as a publicly-listed company, the UK’s fourth-largest supermarket group posted a 37 per cent decline in profits to £105 million for the six months to August 1. The reduction in the pre-tax figure was after absorbing £41m of direct Covid costs, while £80m of profit was lost in cafe, fuel and food-to-go sales.

Morrisons, which is at the centre of a bid battle between two US private equity groups, said it expects “industry-wide retail price inflation” during the second half of the year driven by commodity price increases, freight inflation and the current shortage of heavy goods vehicle (HGV) drivers.

“That combination of a dearth of labour, a dearth of skills, the pingdemic and Covid cases does mean that everywhere in the supply chain there is strain,” chief executive David Potts said.

However, the group still expects to exploit rising sales in the second half of its financial year, and re-confirmed previous guidance that profits are on course to reach £431m for the full 12 months. That would be on par with what would have been achieved in 2020 had Morrisons not returned £230m in Covid rate relief.

READ MORE: Higher bids for supermarket giant Morrisons likely, analysts predict

Emma-Lou Montgomery of share dealing service Fidelity Personal Investing welcomed predictions of improved profitability in the second half but added that there are still a “number of unwanted items in the bagging area at Morrisons”.

“As it says, Covid and now supply chain cost increases have and will continue to weigh down the whole British food industry for some time to come,” she said.

“Whether to pass on the inevitably higher costs to customers – especially at Christmas – will be a particularly thorny issue. And that’s on top of being able to get the goods to stores in the first place, because the shortage of HGV drivers isn’t going away overnight either.”

Despite the difficulties, Mr Potts predicted “biblical” Christmas demand this year with people meeting up in bigger numbers after being restrained by Covid restrictions during the last festive season.

READ MORE: Morrisons feeds into Scottish golf estate plans

Morrisons has agreed a £7 billion takeover offer from Clayton, Dubilier & Rice (CD&R) that is due to go to a vote for shareholder approval in mid-October. However, rival private equity firm Fortress, owned by Japanese investment bank SoftBank, could still come out with an improved bid.

The grocer said on Wednesday that it is in talks with its two suitors and the UK’s Takeover Panel to begin an auction process to settle who will take over the supermarket chain.

Commenting on the first half results, chairman Andrew Higginson said: “Across the business the whole Morrisons team has shown commendable resilience facing into a variety of continuing challenges during the first half, including the ongoing pandemic, disruption at some of our partner suppliers, and the impact on our supply chain of HGV driver shortages.

READ MORE: Morrisons takeover battle deadline extended

“As we approach our busiest time of year, I'm confident the team will continue to rise to all challenges and keep up all the good work to improve the shopping trip for customers."

Revenues at Morrisons – which trades from 497 stores employing more than 110,000 people – rose by 3.7% to £9.05bn in the first half of the year. Profit before tax and exceptional items fell to £105m from £167m previously.

John Moore, senior investment manager at Brewin Dolphin, said Morrisons’ “more integrated approach” leaves it better-placed than many of its rivals to face supply chain uncertainties. The grocer has long-term relationships with its farmers and suppliers, as well as its own food manufacturing sites and fishing fleet.

“The new potential owners will be pleased to see that Morrisons is in relatively robust shape, as it continues to recover from the effects of Covid-19,” he said. “Revenues have increased, as has free cash flow, helping to edge down debt.”

Shares in Morrisons closed yesterday’s trading marginally lower at 291.5p.