MORRISONS admitted today that its performance fell short of expectations last year as it reported a 7% drop in annual profits to £879million.

The supermarket, which generated sales of £18.1billion in the year, said it had not done enough to communicate its promotions and suffered because it still lacked a meaningful presence in the two fastest growing sectors of the market.

It will attempt to rectify this shortfall by accelerating the roll-out of its M Local smaller store format to 100 sites by the end of the year and has confirmed it will launch its online food offer by January next year.

As part of the internet push, it is in discussions with online grocer Ocado about an agreement to share its operating knowledge.

The UK’s fourth-biggest grocer, which employs 129,000 staff at 498 stores, said like-for-like sales dropped 2.1% in the year, while the average of 11.4m customers in its stores each week was down on the prior year.

Chief executive Dalton Philips said: “2012/13 has been a challenging year for the company during which we did not perform as well as we would have wished.

“We are implementing a comprehensive range of plans to address these trading issues.”