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 Last month The Co-operative Group announced an agreed £1.6bn takeover bid for Somerfield, presenting it with an opportunity to cement its position as one of the UK’s leading small format retailers. With store divestments on the horizon, IGD’s Stewart Samuel examines who else may gain from this deal. By Stewart Samuel
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| A Co-operative supermarket | |
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Over the last two years the Co-operative Group has overhauled its product ranges and introduced a new store format, leading to a renewed period of growth. Somerfield has focused on cutting store numbers and developing its product offer to meet its goal of being the local grocery store of choice. While both retailers have undoubtedly undergone significant change in recent years which has led to better performance, does the Co-operative Group's proposed takeover of Somerfield make good business sense?
Consolidation has been a long term trend in the food and grocery industry and this deal will create a business with significant scale. The new group would be the UK's fifth largest food and grocery retailer, generating sales of around £8bn a year with an 8% market share. The group will have around 3,200 stores, focused exclusively on the small-format sector.
Strong Buying Group
Clearly the Co-operative Group will be able to use its scale to drive both cost and operational efficiencies, and in the current trading climate, driving buying efficiencies are also likely to be a priority in order to deliver lower prices to its shoppers.
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Somerfield: recently acquired by The
Co-operative Group | |
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The Co-operative Group already achieves significant buying benefits through the Co-operative Retail Trading Group (CRTG) - adding Somerfield's volumes could transform this into a £9bn food buying group.
“There is a strong strategic fit between the two businesses, with both focused on the highly competitive top-up and convenience shopping market,” commented Chief Executive Peter Marks. "We anticipate real cost and revenue synergies, enabling us to enhance still further the overall value we deliver to our customers."
Delegates at IGD’s annual Convention this October will hear direct from Peter Marks, who is on a line-up of speakers that also includes Tesco, Sainsbury’s, Asda, Morrisons and Waitrose.
For a number of years the Co-operative Movement has focused on small-format retailing, divesting larger stores as it has shifted the focus onto the convenience sector in particular. The Co-operative Group has been at the forefront of this, acquiring Alldays and Balfour in 2002 and 2003. The acquisition of Somerfield will further enhance its presence in this part of the market with the addition of around 100 convenience stores and 150 forecourt stores. However, it is in the small supermarket sector that the group will have a strong foothold, operating over 1,200 stores.
Store Divestments Ahead
There will be a regulatory requirement for store divestments, and these are likely to provide a boost to the expansion plans of a number of other retailers. Surprisingly there is limited overlap in the store portfolios of both retailers and it is estimated that only 200 stores will need to be divested in order to achieve regulatory approval. However, as Morrison's acquisition of Safeway demonstrated, there may also be opportunistic divestments.
Among the key beneficiaries of store divestments are likely to be any of the remaining 21 other Co-operative Societies. Although the Co-operative Movement continues to go through a process of consolidation, a number of the larger societies have ambitious growth plans of their own, and divesting stores to any one of these societies will help to maintain the CRTG's buying scale.
Beyond this group of operators, interest in individual sites will depend on their size, as they could vary from 2,000 sq ft up to 10,000 sq ft. Waitrose is one retailer likely to be interested in acquiring a range of sites. This summer the retailer has developed its own smaller format 'market-town' concept store, with a sales area of around 10,000 sq ft. The stores have a strong emphasis on fresh foods and locally sourced ranges, with local producers encouraged to sample their products in-store. Of the three which have opened to date, two are located within former Co-operative and Somerfield stores. Waitrose is also expected to be interested in a number of the smaller format stores, having recently appointed a head of convenience to lead its entry into this sector. This is new territory for the retailer and it is expected to launch a highly differentiated offer within the next 12 months.
Marks & Spencer is another retailer with ambitious growth plans, although these may be scaled back given the recently announced decline in like-for-like sales across its food division. Over recent years there has been a rapid roll-out of its Simply Food format stores, and while there was always going to be a degree of sales cannibalisation from its foodhalls, this may have proven to be stronger than expected. While the new Director of Food, John Dixon, may want to review progress to date, the opportunity to acquire additional sites may be difficult to resist.
While the discounters, Aldi, Lidl and Netto also have plans to significantly expand their store portfolios, their preference is for new build sites as this enables them to replicate their standard store footprint which is a key driver of their operational efficiencies.
Smooth Integration Key to Success
Therefore while this deal will be transformational for the Co-operative Group, it is also likely to create growth opportunities for other operators. The clear challenge for the Co-operative Group will be to ensure the smooth integration of the businesses. Experience from the successful merger with United Co-operatives will stand it in good stead.
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