The Morrison's acquisition will emerge as one of the key defining events in the history of UK grocery retailing and the impact from the deflationary fall-out will be considerable, according to Verdict.
"Morrison's will need to recover lost footfall at the Safeway stores it acquires and will introduce a far more price competitive offer. Sainsbury will be making a big price noise of its own and neither Asda nor Tesco will take either of these developments lying down. Consumers will be the winners from significant price cutting activity with grocery deflation forecast to be the lowest for over a decade," Verdict said in its Grocery Retailers January 2004 report.
With price deflation expected to be -1.0 per cent this year, compared to inflation of +0.9 per cent for 2003, the UK supermarket sector will be a very different place to do business in 2004 than it has been over the past few years, Verdict suggested.
"The retailer under greatest pressure to deliver will be Sainsbury. 'Making life taste better tomorrow' has been its recurring message, but in 2004 it finally needs to show it can generate significant top line growth to sustain its improving profitability. Indeed, whether Sainsbury can reap the rewards of its huge business transformation investment will have a major bearing on the fortunes of all the grocery sector's leading players. However, immensely frustrating for Sainsbury will be the need to prove itself in a far more price-led market - arguably its Achilles' heel."
On the positive side, Verdict suggested, is the fact that Sainsbury retains a loyal core shopper base and a substantial family shareholding that provides insulation from any possible hostile takeover distractions. "In addition, and though it still has much to prove, it is now targeting non-food as a sales growth source. It should also benefit - to an extent - from its more upmarket differentiation as a significant proportion of the sector's selling space moves towards a more price-led focus with Morrison's takeover of Safeway."
But, according to Verdict, Sainsbury's biggest challenge will be the re-engineering and compelling communication of a sharper value proposition. "It recognises the growing importance of price in determining consumers' buying behaviour and has promised to be far more aggressive with its pricing in 2004. But even with new Sainsbury, there is the same old problem: how to communicate a stronger price-led message effectively while differentiating the business on a quality and choice platform? It will need to ensure that its voice is heard over heavy price drum banging by its rivals."
Margin pressure boosts non-food offer
The inevitable downside to price deflation is the growing pressure on profit margins, and this will only fuel grocers' drive to enhance their non-food ranges, Verdict predicts.
"Non-food has played - and will continue to play - a key role in determining the grocery sector's winners and losers. In the fast lane for sales growth in 2003, and over the longer 1998-2003 period, were Tesco, Asda, Morrison and perhaps surprisingly to some, the Co-operative Group.
"Stuck in the slow lane were Safeway, the Somerfield Group, Iceland and Sainsbury. Key win factors are an extensive larger format, superstore portfolio (with space for non-food), strong customer recognition of keen price competitiveness and the capacity to make and integrate acquisitions," the Verdict report suggests.
Top 10 grocery retailers % change in market share 2003 on 2002
Source: Verdict Analysis
Tesco was the clear market share winner in 2003, helped by its unrivalled space growth, strong existing store sales gains and the acquisition (unfettered by a regulatory review) of convenience store specialist T&S Stores. Moreover, Verdict said it expected Tesco to emerge as a long term beneficiary of the fallout following the Safeway takeover.
Acquisitions: where next?
The outcome of the Competition Commission's deliberations was good news for Morrison, since it emerged as the sole bidder for Safeway, but Verdict argues that that decision also opened a window of opportunity for Sainsbury, and could have been much worse for Tesco.
"Asda Wal-Mart will still be kicking itself all the way back to Bentonville, Arkansas for missing out on Safeway and the only realistic chance it had to challenge Tesco for market leadership. A pre-emptive cash strike earlier could have worked, but Asda overlooked the wily ambitions of Sir Ken Morrison and waited too long. Indeed, we believe Tesco's market leadership and growing dominance will be cemented by Morrison's takeover deal."
Morrison will now also join the dog-fight for second place in the new order of grocery retailing, Verdict forecasts. "Just half of one percentage point will separate the chasing pack of Asda, Sainsbury and Morrison by 2006.
"Assuming Morrison retains all of its permitted Safeway portfolio, that it succeeds in raising Safeway's sales density half way towards its own and that it maintains strong existing store sales and space growth, Verdict predicts its share will increase to 12.3 per cent. These conservative gains will place it only narrowly behind Asda's 12.8 per cent (which excludes what is likely to become a significant contribution from standalone George clothing stores) and Sainsbury's 12.6 per cent.
"In short, there is still much to be fought for, but the going will get tougher and gloves are coming off."