Somerfield confirms recovery but has plenty still to do

- Last updated on GMT

Related tags: Kwik save, Retailing

Somerfield, the UK supermarket group, is continuing on
the road to recovery after several difficult years following its
acquisition of the Kwik Save chain.

The company today reported pre-exceptional operating profits of £17.2 million, for the 28 weeks ended 8 November 2003, a major improvement on the £7.9 million a year earlier, in turn lifting pre-tax profits from £6.4 million to £15.5 million.

Sales for the period were broadly flat at £2.69 billion, however, with improved performances from refitted stores offsetting the £36.3 million in lost revenues from stores closed during the previous year.

But the Kwik Save discount food store chain is still proving a difficult business to manage. Like-for-like sales at Somerfield stores were up 2.2 per cent for the half, but Kwik Save's same store sales were down1 per cent.

John von Spreckelsen, executive chairman of the Somerfield group, admitted that Kwik Save in particular was still in need of significant investment, but said he was pleased with the overall interim results, which showed that the company was moving in the right direction.

The company should have little difficulty financing the overhaul of its store portfolio, at least, with an exceptional profit of £2.1 million during the half from property disposals, low levels of debt (£10.7 million) and good cash generation from operations. Capital expenditure investment on both Somerfield and Kwik Save during the period was £112.1 million, almost all of which was invested in the store retail estate.

The company's strategy is to focus on stores of 2,000 to 15,000 square feet for Somerfield and 6,000 to 12,000 square feet for Kwik Save stores, and in its larger stores it has effectively reduced the core Somerfield and Kwik Save customer offer by partnering other companies such as Peacocks, a clothing retailer, and Tchibo, a German non-food retailer.

So far, approximately 25 per cent of the total Somerfield estate has been revamped, with 30 new concept stores opened and nine Kwik Save stores converted to the new Somerfield format during the half. All these stores have experienced like-for-like sales growth of around 20 per cent following conversion, the company said.

At Kwik Save, meanwhile, the pace of conversion is slower, reflecting the scale of the task. With UK consumers looking for increasingly sophisticated shopping experiences, Kwik Save has suffered from a somewhat down market image, and Somerfield has been forced to rethink the chain's entire concept.

Kwik Save has not abandoned its discount stance and continues to focus on keeping prices as low as possible. What has changed, however, is the store design and management, with better in-store systems, an expanding range of own label products, customer service and product range.

Some 14 Kwik Save were refitted last year, with an additional 32 stores in the first half of this year, and while they have shown a major upturn in performance as a result of the conversions, they form only a tiny part of the 649-strong Kwik Save store portfolio, meaning that they had no material impact on Kwik Save's overall like-for-like sales performance.

But Somerfield's efforts are not focused solely on improving performance at its existing businesses - it is also pushing into new areas of the retail market.

It has continued to expand its petrol station forecourt business, which now comprises 27 stores under the Somerfield fascia, and is working on developing its partnership with TM Retail, which currently sees Somerfield supply and deliver a full range of fresh, ambient and frozen food, beer, wines and spirits to six Martin's newsagents.

Somerfield is also preparing to roll-out a new franchise package for independent retailers early in 2004, a move which goes some way to explaining its interest in the Londis group, which operates along the same lines. Even if Somerfield is not successful in buying Londis, it will certainly hope to persuade a number of Londis retailers to convert to its franchise system.

But all Somerfield's efforts to revitalise its stores will come to naught without an efficient supply chain, and the group has recently opened a major new distribution centre which enabled four smaller depots to be closed, with a further three to close in the second half.

While this will clearly create a more efficient supply chain, the group took a charge of £6.8 million in the first half relating to the cost of redundancies and other closure costs associated with the depot rationalisation. Further costs are expected in the second half.

Somerfield fought off a hostile takeover bid last year from a consortium which included Sainsbury, a sign perhaps that the company's recovery strategy is well-regarded by the rest of the industry. Any future offers for the company are likely to be just as strongly rebuffed by the management, which clearly wants to see the strategy through to its conclusion.

But Somerfield still runs the risk of falling into the gap between large store operators and small convenience store chains, and will have to offer something truly different to continue to fend off the advances of other groups in the future.

Related topics: Market Trends

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