Five bidders are currently in the battle to acquire UK supermarket chain Safeway. Retailers Asda, Morrisons, Sainsbury’s and Tesco have all shown interest, as has retail entrepreneur Philip Green. As the Competition Commission continues its deliberation, Euromonitor International looks at the effect each possible outcome would have on the UK grocery market.
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On 19 March the UK Secretary for Trade and Industry made her decision to refer four out of the five bids for UK supermarket chain Safeway to the Competition Commission, whose subsequent report is expected in August 2003. All but Philip Green’s bid raise concerns regarding competition in food retail. The referral of Morrisons’ bid to the Competition Commission came as a surprise to many in the industry with its relatively small overlap in stores with Safeway.
While Sainsbury’s and Tesco have also submitted bids, neither is likely to gain Competition Commission approval and the most that either can hope for would be to purchase store locations which the Competition Commission requires be sold to prevent an overly large retail share for the successful bidder. Each of the three most likely winners, Wm Morrison, Asda and Philip Green will have a significant, albeit different, impact on the supply side of UK grocery retail resulting in varying degrees of consolidation among manufacturers of FMCG products (fast moving consumer goods).
High stakes in Safeway bidding
Without question the stakes are high. UK food retailing is already highly consolidated even before the sale of Safeway is completed. Over 70% of all grocery sales in 2002 went through the top four multiple grocers: Tesco, Sainsbury’s, Asda and Safeway.
Morrisons, according to industry estimates, holds approximately 6% of total grocery sales. However Safeway, with its share of grocery hovering around 10%, would make Morrisons a major player, close on the heels of Sainsbury’s. In an already mature market, Safeway represents the single largest grab for market share likely to be available for some time.
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By GlobalDataHowever, regardless of who finally takes the reins of Safeway, the end result will be further consolidation of an already consolidated retail landscape. This will have a direct impact on the supply side of UK grocery, shifting profit from manufacturers (supply side) to consumers (demand side) as retailers use price as their primary weapon to battle for market share. Price cuts will come with consolidation and will be further encouraged by a floundering economy where real income growth slows. Retail consolidation and poor economic performance will work hand in hand to create price deflation in UK packaged foods. Medium-sized to small manufacturers are likely to feel the brunt of a stronger negotiating position among retailers resulting in consolidation among their ranks.
The degree to which all this is likely to happen is dependent on which of three scenarios is most likely to occur. Assuming Sainsbury’s and Tesco are the least likely to succeed, the focus of speculation is on Morrisons, Asda and Philip Green, each having a different impact on grocery retailing in the UK.
Synergy from successful bid
Asda with its EDLP strategy and Wal-Mart-inspired emphasis on low prices is most likely to cut grocery prices and these are unlikely to come at the expense of Asda margins. Even after selling some Safeway stores to meet Competition Commission requirements, Asda will find itself closely following Tesco in terms of retailer share and will use its increased buying powder to renegotiate more favourable terms with its suppliers.
David Simons, former CEO of Somerfield, estimated the potential cost savings resulting from the acquisition of Safeway to be at least £200m (US$328.4m) – even the much smaller merger between Kwik Save and Somerfield resulted in £80-100m cost savings based on renegotiating contracts with suppliers.
Asda is also likely to pass some of these savings on to consumers, as Tesco becomes it next hurdle. Tesco is likely to retaliate with price cuts of its own and Sainsbury’s would find itself in an unenviable position of losing its comfortable second place ranking. If Tesco and Asda compete with one another on the basis of price cuts, Sainsbury’s will find it difficult to justify being the most expensive of the top three retailers without a strong USP (unique selling point).
Manufacturer favourite
Morrisons is the other major retailer in the running. It is highly regional with a strong presence in the North of England, but only marginal presence in the South where Safeway represents a key point of entry. It therefore has the most to gain from acquiring Safeway, having reached critical mass in the North and being eager to compete on a national scale.
Based on the resultant impact on prices, Morrisons would be the preferred bidder among many manufacturers. It can most likely expect to take fourth position behind Asda – Safeway’s retailer share did not improve over Christmas and confusion and lack of focus in the face of a long and drawn out Competition Commission investigation is likely to see it decline further over the Spring and Summer.
While a Morrisons/Safeway entity will not have the buying power of Asda/Safeway, it too will result in a transfer of profits from manufacturers and is also likely to trigger a price war. A lame Safeway was a predictable if not significant adversary. Any buyout by another major retailer will be met with aggressive pricing from Tesco and Sainsbury’s, thereby exacerbating pressure on manufacturers to sell their products at lower margins.
Sidelines not safe for smaller retailers
From the supply-side perspective, either of these two scenarios will result in consolidation among smaller manufacturers, whether branded or own label. Larger manufacturers such as Unilever, Britvic and Procter & Gamble will be least affected, having significant negotiating power of their own and a clearly communicated pricing structure. However, some medium-sized and smaller brands and own label manufacturers, already under significant pressure to meet the demands of retailers, may not survive either scenario.
According to Simons medium-sized brands may see 5-10% cut from their margins. Smaller manufacturers of tertiary brands may face as much as a 30% reduction in their factory gate prices. Own label manufacturers, which are too small to benefit from the economies of scale to be gained from larger orders to a smaller client list, will be equally hit.
Quite simply, mergers and acquisitions within the supply side of UK grocery will come about with any Safeway takeover by another retailer. Somerfield and Iceland were the most likely targets for acquisition. Somerfield has already become the target of a takeover bid. Planning restrictions limiting the opening of new larger store formats are making these smaller chains even more attractive.
Private label to benefit
With Taste the Difference at £350m in sales and Tesco’s Finest at £500m in 2002, private label factory gate margins may be squeezed, but private label as a whole is likely to gain in importance. One of Safeway’s greatest downfalls was its unpersuasive own label offering. Shortly before the Morrisons announcement was made in January, Safeway had begun to place an increased importance on own label and in February announced a £1m revamp of its own-label Indian range. Safeway’s The Best, its key premium own label offering, was valued at £100m in 2002, putting it far short of Taste the Difference or Finest. Low sales were due primarily to Safeway’s late commitment to investing in private label.
The absence of a persuasive own label offering was a major factor behind Safeway’s notorious lack of consumer loyalty with shoppers coming to stock up on heavily discounted advertised products and then leaving without doing their weekly shop. Asda meanwhile may need to re-evaluate its premium label offering if it hopes to keep Safeway consumers happy. Asda with its family friendly private label places a greater emphasis on its budget lines. Safeway shoppers will need to see a wider range of own label products if they are to be convinced to move to fill their baskets at Asda/Safeway.
Whichever of the two retailers purchases Safeway, own label and in particular premium ranges, will likely receive a boost overall. Asda would need to broaden its own label ranges to include a well developed range of premium products. Morrisons is in a similar position, having no nationally recognisable private label brands. It will need to create a range of well-branded private label ranges from premium to healthy to budget, to accommodate a new demographic of southern shoppers. It can do this either by continuing with the work begun on the Safeway ranges including Eat Street and the Best, or by creating its own brands.
The Joker in the deck
The last scenario is that of Philip Green acquiring Safeway. A successful bid by Green is a wild card in terms of its expected impact on the supply side of grocery. On the one hand by operating Safeway as an independent retailer, the status quo will initially be maintained and no significant impact on suppliers is expected. However, in the mid- to long-term the impact of Philip Green’s purchase is highly dependent on the choices he makes and the direction in which he chooses to move the retailer.
The Green camp got a boost by sailing smoothly past a government referral to the Competition Commission. This undoubtedly improves Green’s chances and may encourage Safeway shareholders to accept a lower bid from Green rather than wait it out on a long bureaucratic process not due to be completed until August.
One probability of Green getting Safeway is the sale of many Safeway locations- with Waitrose, Marks & Spencer as well as rival bidders Sainsbury’s, Asda and possibly Tesco likely buyers. Green is also likely to diversify Safeway into non-food sectors thereby reducing its share of grocery and allowing further consolidation of the top three Tesco, Sainsbury’s and Asda. Between 100-150 Safeway stores are likely to be sold off.
Indeed the combination of selling stores and a reduction in the Safeway grocery offering may actually result in more consolidation within UK grocery than would a sale to Morrisons.
Related research from Euromonitor:
The Market for Packaged Food in the UK
