Encouraging results from Somerfield, but plenty still to do

- Last updated on GMT

Related tags: Kwik save, Morrisons, Sainsbury's

Somerfield, the British retail group, continues to struggle with
its Kwik Save unit, acquired in 1998. The company has taken a long
time to find the right trading format for the discounter and
recently took the decision to close or convert all the chain's
Scottish stores - but with a first half performance that beat
analysts' expectations, has the corner finally been turned? asks
Chris Jones.

Total sales for the half were down by a round 1 per cent to £2.38 billion, but like-for-like sales showed a 0.6 per cent increase, with a drop at the Somerfield fascia offset by a marked improvement at Kwik Save, whose like-for-like turnover rose 0.1 per cent in the first half compared to a drop of 1 per cent in the previous year.

The Christmas period was tougher for both banners, with sales in the first ten weeks of the second half, including Christmas, down 1.2 per cent at Somerfield and 1.6 per cent at the discounter. However, this was broadly in line with most of the rest of the British food retail trade which struggled to improve on the previous year's performance.

The closure of the Kwik Save Scotland business - which had proved impossible to turn around - shaved £8.8 million off the company's first half pre-tax profits, which plummeted 15 per cent to £15 million. Operating profit fell 44 per cent to £5.8 million, hit by the exceptional charges relating to the Scottish closure, but underlying results were nearly double the previous year at £32.7 million.

This improvement, said chief executive Steve Back, reflected the company's ongoing efforts to revamp its business which has seen it expand further into the convenience store sector with the acquisition of the Scottish group Aberness and the launch of its own Somerfield Essential format, as well as the addition of 114 smaller Safeway stores from Morrisons. A number of Kwik Save stores have been converted to the higher margin Somerfield banner, while refits and store closures have also contributed to the solid profit performance.

With the growth in the convenience store sector driven by Tesco and Sainsbury's decision to move back into town centre locations after years of development on the fringes, Somerfield is well placed to benefit, given that a large proportion of its stores are already in prominent high street positions. But first it needs to reverse its own decision to move into larger stores - a move which by and large failed - and revamp its now jaded high street portfolio.

It seems like Somerfield has been in a constant state of restructuring for the last six years, but there has been considerable progress made during that time - enough, certainly, to make Somerfield a takeover target in its own right back in 2003. But the fast pace of change in the British retail sector means that the company has been forced not only to juggle the changes at Kwik Save but also fight off competition in the high street by updating its stores and moving rapidly into the convenience sector - a lot of balls to keep in the air and still grow the business.

Kwik Save continues to be a cause for concern, especially in a market where the mainstream retailers (Tesco, Asda and Morrisons in particular) are driving prices so low that they can undercut the discount operator. Yet the company clearly believes that there is a market (still) for Kwik Save's no-frills type of operation, having converted a number of Somerfield stores to the banner during the half, reasoning that the local market was better suited to the discount format.

The company's efforts could perhaps be better focused on creating a strong business under one single brand name, especially as it now has three different acquisitions (Aberness, Safeway and Kwik Save) to manage at the same time. With the major multiples encroaching on Somerfield's traditional patch now more than ever, the company needs to make things as simple as possible.

Sainsbury's attempts to convert its stores, push down prices, offer better customer service and launch itself into non-food all at the same time led to that company's current depressed state, and Somerfield's management might wish to take note, especially as all the indications are that pressure on smaller operators is likely to increase more than ever in 2005.

Related topics: Market Trends

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