Beyond Safeway: the changing face of British retail

With all the rival offers blocked by the Competition Commission and Safeway’s management team backing the latest offer, Morrisons’ takeover bid now looks certain to succeed. But the hardest part of the operation is still to come.

Bryan Roberts, retail analyst at M+M Planet Retail​ told FoodandDrinkEurope.com​ that while he was broadly confident that Morrisons could succeed in integrating the much larger Safeway business, it was likely to be a process fraught with danger.

“These are two companies with vastly different business models. Morrisons is a regional operator, essentially family-controlled [although it is a listed company, the Morrison family has a 51 per cent stake] and is focused on a value offering and an EDLP (Every Day Low Prices) policy,”​ Roberts said.

“Safeway, on the other hand, is positioned a bit more upmarket, with a promotion-driven policy and higher prices. It has no real family identity, having essentially been created through the merger of numerous smaller chains.”​

Above all, Morrisons must avoid “doing a Somerfield”​, said Roberts, referring to the ill-fated move by that chain to try and run the discount retailer Kwik Save as a separate business, a move which plunged Somerfield into a steep decline from which it is only now emerging.

“Morrisons need to get on with rebadging the Safeway stores as quickly as possible, and avoid running the two businesses side by side for too long. Morrisons’ ‘store-within-store’ approach is highly distinctive, and offers a real point of difference not only from Safeway’s stores but also from those run by most of its rivals as well.” “Whether this approach – and the EDLP policy - will necessarily appeal to shoppers in the south east of England, where Safeway has a high concentration of stores and where consumers are more affluent - remains to be seen, but it should certainly be better than the confusing proposition currently offered by Safeway.”​

Roberts said that Safeway was generally regarded as inferior to the likes of Tesco and Sainsbury, and certainly more expensive. “It has flirted with things such as non-food and clothing ranges, but without any great success, and this has merely served to dilute its proposition even more.”​

But if the task of integrating the businesses will be hard, it would have been harder still if not for the advances made in recent years under Safeway’s chief executive Carlos Criado-Perez. “There is still some work to be done on reducing prices, but Safeway has come a long way in a relatively short time under Carlos,”​ said Roberts. “For example, the fresh food offerings in some Safeway stores are among the best in the UK.”​

Roberts suggested that the best way forward for Morrisons was to focus on converting the larger Safeway stores to its own banner, while leaving some of the smaller outlets to continue under the Safeway name for now. As for disposals, he highlighted the Safeway joint venture with BP which was “not in Morrisons expertise”​ and was almost certain to be sold off.

And what of the rivals?​

Morrisons might have emerged as the sole bidder for Safeway, but only after a lengthy consultation period by the Competition Commission which ruled out rival bids from Tesco, Asda and Sainsbury. So where does the failure to get their hands on Safeway leave these three?

“Quite frankly, the response from Tesco and Asda is likely to be ‘so what?’,”​ said Roberts. “These are businesses which continue to go from strength-to-strength, and while the addition of Safeway would have perhaps accelerated that growth, neither chain will lose too much sleep over their failure to buy it.”​

Sainsbury, on the other hand, has reason to be “grotesquely worried”​ by Morrisons’ takeover of Safeway. “Sainsbury needs to take a long hard look at what it does in the light of its failure to capture Safeway,”​ said Roberts. “It is already suffering, mainly from the lack of a coherent strategy about where it is, and this needs to change.”​

Roberts suggested that the best option for Sainsbury would be a change of image and a return to its heritage. “Sainsbury needs to become more like Waitrose and less like Tesco – focusing on its traditional strength as an upmarket retailer targeting affluent customers in the south east of England.”​

“The company should have moved more strongly into the convenience store market, as Tesco has done, but following Tesco and Asda into non-food is not necessarily the right move. Sainsbury’s shoppers are essentially affluent middle class – do they really want to buy their clothes, electrical goods and crockery at the supermarket?”​

But it is not all doom and gloom. Sainsbury is doing some things very well indeed, according to Roberts. “It’s e-commerce operation is among the best in the country, as is its supply chain. And while the overhaul of the company’s store portfolio has been lengthy and fraught with difficulties, the new look outlets are excellent.”​

Such has been the decline of the Sainsbury business over the last few years that rumours have been growing that the company might even be vulnerable to takeover, but Roberts suggested that this was unlikely.

“The Sainsbury family have such a tight control over the company that a hostile bid is out of the question. And even if the family decided they had had enough and wanted to get out of the supermarket business, who would want to buy Sainsbury anyway? Names such as Carrefour, Casino and Delhaize have been linked to Sainsbury in the past, but there is no real interest for them. The most likely candidate would have been Ahold, but it has enough problems of its own at the moment.”​

If not Sainsbury, then who?​

But there are other, easier, takeover targets in the UK retail sector, according to Roberts.

“Somerfield could be a possible target, especially as it is finally getting to grips with Kwik Save. But again, the question is really why would anyone want to buy it? It could be run as a going concern, or asset stripped with the major players buying up stores here and there, but this is looking increasingly unlikely, not least because the company has already rebutted several approaches.”​

So what of Iceland, the other medium-sized player in the UK market? “The city centre location of most of Iceland’s stores could make it a possible target for Sainsbury if it decides to go further down the convenience store route,”​ Roberts said.

“But would this offer the right consumer demographics for Sainsbury, with its middle class focus?”​

A more likely scenario, according to Roberts, is an eventual takeover by Baugur, the Scandinavian retail group which has a major stake in the Big Food Group, owner of both Iceland and wholesale group Booker.

“There are potential benefits for both Baugur and Iceland from a takeover, especially with Baugur’s expertise at the discount end of the market through its Bonus business. But this would almost certainly mean splitting off the Booker business since there are no synergies at all from a link up with Iceland – in fact, it is hard to see why the two businesses were combined in the first place.”​

Elsewhere, Roberts suggested that there could be some more movement in the convenience store sector along the lines of Musgrave’s recent acquisition of Londis, but that the major players were much more likely to turn their attention to the non-food retailers as they looked to expand, not least because this would avoid most competition concerns.

“Tesco has already admitted that it is interested in moving much more into the non-food sector, and Asda is well on the way too, so we might see companies such as clothing retailer Matalan, Boots the chemist or even diversified groups such as Woolworths targeted in the future,”​ he said.

Overseas opportunities still exist​

But there are still numerous possibilities for Britain’s leading retailers in foreign markets, where competition issues are also less relevant.

“Given its success with Shaws in the US, Sainsbury could look to add further operations there, snapping up some of the regional supermarket groups,”​ said Roberts.

“The States is also the only major market where Tesco has no presence, and a market that it really has to crack if it wants to truly play with the big boys. It has very close links with the US Safeway chain, and there could be opportunities there, although that company has its own fair share of problems at the moment, so perhaps it will look to other nationwide operators such as Krogers or Albertsons? In any case, there are plenty of businesses to choose from, and Tesco will almost certainly want to get at least a foot in the door.”​

Roberts said that the US would not be the only target for Tesco. “It has entered two new markets this year – Turkey and Japan – and China and India are likely to follow suit soon,”​ he said, adding that other emerging markets in Latin America and eastern Europe were likely to be lower down the list of priorities for the British number one.