WM MORRISON beat City forecasts as it booked a 3.6 per cent rise in like-for-like sales in the first quarter, sending shares in the grocery giant up nearly three per cent.

It was the tenth consecutive quarter of like for like sales growth to be reported by the UK’s fourth biggest grocery group, which was boosted by strong growth in its supermarket and wholesale operations.

However, analysts warned there is a challenge coming down the track for the Bradford-based chain with the proposed mega merger of Sainsbury’s and Asda.

The proposed £7.3 billion deal would create the UK’s biggest grocer, knocking Tesco off the top spot, although Morrisons could be well placed to pick up stores if the competition watchdog orders the merged grocer to slim down its estate.

Chief executive David Potts refused to rule out Morrison’s making a bid for Sainsbury’s itself when asked by reporters yesterday.

And he declined to comment when asked whether Morrisons was seeking a closer relationship with Amazon, the online giant which made a big entrance into the grocery world when it acquired Whole Foods last year.

Amazon was credited last week with making contact with the John Lewis Partnership over a takeover of Waitrose.

Nicholas Hyett, equity analyst at stockbroker Hargreaves Lansdown: “These are good results from Morrison – with progress in the store estate as well as the fledgling wholesale business.

“Delivering steady growth despite lacking a convenience or online offering of any real scale bodes well. A renewed focus on price and the customer experience seems to be paying dividends and management remain upbeat.

“But with the soon to merge ‘Asbury’ likely to be squeezing Morrisons from both top and bottom, and a reinvigorated Tesco looking increasingly aggressive and expanding into wholesale, the outlook for Morrison is perhaps not as rosy as first glance would suggest. The UK supermarket sector has got more competitive and Morrison is caught right in the middle of it.”

Morrisons’ recovery under Potts continued into the first quarter as it highlighted strong growth in its grocery and wholesale arm, which each saw like-for-like sales growth of 1.8%.

Amid increasing consolidation in the grocery sector, where recent deals have seen Tesco acquire Booker and the Co-operative Group agree to buy convenience store group Nisa, Morrisons said it was now “open for business as a wholesaler”. ‘

After striking a deal with McColl’s last year, Morrisons is now rolling out wholesale supplies to the newsagent and convenience store group with fresh, frozen and ambient goods under the revived Safeway brand.

Morrisons added McColl’s stores to its customer base at a rate of 25 per week during the first quarter.

Noting that it had started supplying McColl’s stores with tobacco and some ambient products slightly earlier than planned, Morrisons said it was on track to hit its annual target of £700m from wholesale sales by the end of the year and “£1bn in due course”.

The grocer said it had increased its competitiveness against a backdrop of a “broadly flat” inflation rate in the first quarter, with volume growth accelerating over the period.

Against a backdrop of flailing real wage growth, Morrisons has launched “Wonky” brands of low-priced fruit and vegetables”, and a “Savers” own-label range of ambient, chilled and frozen items.

Clive Black, head of research at Shore Capital, said: “Morrison is a group that is increasingly in control of its own destiny, robustly positioned for any Asda-Sainsbury combination (should it happen).”

Mr Potts noted: “We are pleased to have made a strong start to the year, again becoming more competitive for customers while delivering growth. We expect to continue to improve in the year ahead.

“During a busy period of exciting new ranges, new store openings, strong supermarket and wholesale growth, and the peaks and troughs of the seasons, our colleagues once again did an outstanding job for customers.”

Shares in Morrisons closed up 6.2p, or 2.53%, at 251.6p.