Morrisons gets down to business
the difficult task of integrating the two businesses and bringing
the profitability of Safeway's somewhat downmarket stores up to its
own high level.
Sir Ken Morrison, head of the eponymous supermarket group, yesterday outlined some of his plans for Safeway, and gave some more details on the scale of the task ahead.
Safeway's performance has naturally suffered as a result of the uncertainty over its future, with plans for new stores and refits effectively put on hold for the last 14 months, and Morrisons' first task will be to increase sales and profitability per store.
The most recent figures, unveiled by Sir Ken yesterday, show some improvement at Safeway over the last few weeks, with like-for-like sales some 3 per cent lower than at the same period last year. In the three months to 3 January, sales were 4 per cent lower than the previous year.
In contrast, Morrisons' sales are running at around 14 per cent higher than the previous year.
So converting Safeway's stores to the Morrisons format - and to its pricing structure - will be the top priority for the Yorkshire group. A conversion programme will begin in August focusing on Safeway's larger stores and aiming to reformat three stores a week.
But if changing the look of the stores is likely to happen relatively quickly, improving their performance will take longer - Sir Ken suggested that it would take 18 months or so for Safeway's stores to begin performing at roughly the same level as Morrisons'. At present, the average consumer spend per Safeway store is £16; the aim is to reach £25.
With both Tesco and Sainsbury moving rapidly into the High Street convenience store market, Morrisons had been expected to adopt a similar strategy, and Sir Ken yesterday confirmed that the smallest Safeway stores - 138 in total - would indeed be converted to a new convenience format. They will also keep the Safeway name alive, trading under the Safeway Compact banner.
But Sir Ken also hinted that the long-term future of this small-store format was still under review, not least because the company had received a number of approaches from rival chains for the smaller stores. For now, though, the company appears happy to dip its toe into the water and see if it, too, can make more money from a presence in the convenience sector than from withdrawing from it completely.
The convenience strategy will also mean that Morrisons will roll out a dual pricing strategy, bring prices at the larger Safeway stores in line with its existing structure (some 300 products benefited from price cuts yesterday alone) and maintaining the higher prices at the Safeway Compact outlets.
Morrisons still has to sell 52 stores to comply with the requirements of the competition authorities, but these disposals should be completed soon, with buyers lined up for virtually all of the 48 Safeway and four Morrisons stores. The group will have around 552 stores following the sale of these outlets.
As for the cost of integrating Safeway, Morrisons estimates that it will cost around £525 million a year for the next three years, with some £260 million set aside for conversion of the Safeway stores and a further £420 million for infrastructure costs.
But the gains it is likely to achieve over this three-year restructuring period are substantial, according to research from the Institute of Grocery Distribution in the UK. The IGD suggests that the enlarged group will have sales of £14.6 billion and a market share of around 12 per cent by 2007 - leaving it snapping at the heels of Sainsbury, the UK's number three grocer.
The IGD report estimates that the savings achieved as a result of Morrisons' increased scale will total £692 million over the first three years.
But Joanne Denney-Finch, IGD chief executive, suggested that the takeover would have less of an effect on pricing than some observers had suggested, despite Morrisons' price cuts. "There is no doubt that this merger will continue to drive competition in the grocery market. Price has been on the agenda for some time now and there will be no change to this for those for whom price is a key differentiator.
"However our research shows that shoppers want innovation, choice, value and a great shopping experience all at a reasonable price. It is therefore unlikely that there will be a price war, as everyone needs to invest in all elements of the shopping proposition. To compete, grocery retailers will be looking to develop new ranges of goods and services in non-core areas and push forward development of new store formats. This will all mean a better deal for customers."
Despite Sir Ken's bullish outlook, integration will not be an easy task, according to the IGD. "The two retailers cater for different core customers. Morrisons' shoppers are younger and less affluent (compared to the UK average for grocery retailers) and the challenge will be to retain the older and more affluent Safeway shopper by ensuring the total store offer meets their needs in terms of range, ambience, services and other things in the value equation than just price," said Denney-Finch.
