* Says consumers want more local produce
* Two-thirds of revenue from British products
* Beats forecasts with 11 pct profit rise
* On track to hit financial targets (Recasts with CEO comments at briefing, updates shares)
By James Davey
LONDON, March 14 (Reuters) - British supermarket group Morrisons said on Wednesday it would boost its campaign to recruit more local suppliers, seeking to further differentiate itself in a brutally competitive grocery market.
Chief Executive David Potts, who joined Morrisons in 2015 to lead a recovery after it was badly damaged by the rise of discounters Aldi and Lidl in its northern heartland and the strategic errors of previous management, said the move reflected consumer demand rather than a direct response to Brexit.
“Customers perceive local to be fresher,” he told reporters after Morrisons beat forecasts with an 11 percent rise in 2017-18 profit and paid a special dividend, reflecting its confidence in the future.
“Two-thirds of what we sell is British, so we’re in tune with that idea, even before we become very local,” he said.
In the year to Feb. 4 2018, Morrisons recruited over 200 new local suppliers, defined as within a 35 mile radius of a store, listing 750 new products, such as Plumgarths sausages in its Cumbrian stores in north west England and Edinburgh Gin in Scotland.
Overall sales of local suppliers’ products across Morrisons have increased 50 percent over the last two years.
Potts said the initiative had significant scope but declined to give specific targets.
“This business needs to have less national duplication of merchandise and it has to have more local merchandise as we become truly integrated locally in the years ahead,” he said.
“It sits very nicely with society’s view that enough is enough on plastic and that food waste is excessive.”
Morrisons, the smallest of Britain’s big four grocers, is trying to broaden its business by improving the performance of its 500 UK stores while also pursuing growth in online and wholesale markets.
Based in the northern English city of Bradford, the group made an underlying pretax profit of 374 million pounds ($522.6 million) on revenue up 5.8 percent to 17.3 billion pounds.
The unexpected special dividend of 4 pence per share took its full-year payout to 10.09 pence, up 86 percent.
Morrisons’ shares gave up early gains to be down 5 percent by 1536 GMT, reflecting concern the profit beat owed more to lower finance costs than strength in the underlying business, and concern over a fall in free cash flow.
“This will temper somewhat the excitement of the special dividend,” said Bernstein analyst Bruno Monteyne.
Although discounters are still winning market share, Potts has delivered nine straight quarters of like-for-like sales growth.
Morrisons trails clear market leader Tesco, Sainsbury’s and Walmart’s Asda in annual sales.
Potts, who worked for Tesco for 39 years, has overseen a steady improvement in trading, with more competitive prices, improved product ranges and availability as well as better customer service in refurbished stores.
He has also overhauled Morrisons’ online strategy through a renegotiated agreement with distributor Ocado and struck wholesale supply deals with Amazon, Rontec petrol forecourts, the McColl’s convenience chain and Channel Islands retailer Sandpiper.
Morrisons said it was on track for its target of 700 million pounds of annualised wholesale sales by the end of 2018, and its medium-term target of 75-125 million pounds of incremental profit from wholesale, services, interest and online. ($1 = 0.7157 pounds) (Editing by Keith Weir/David Evans)