business news in context, analysis with attitude

News & Analysis from
Safeway, the UK’s fourth largest grocery retailer, is at the centre of a frenzied takeover battle. The first shot was fired by Yorkshire grocer Morrison's last week when it announced that Safeway had agreed to a recommended share offer of GBP2.9 billion (USD4.3 billion). This announcement was followed four days later by Sainsbury’s, which put a cash and share offer on the table equating to £3.2 billion (USD4.8 billion). Not to be outdone, Wal-Mart is now poised to enter the auction, with an “attractive cash offer” o be put forward subject to talks with the Office of Fair Trading. Further, Tesco, which has stayed out of the battle as the acquisition would inflate its market share to an unacceptable proportion, has also stated that it may be prepared to buy Safeway’s c-stores.

Safeway has had a chequered history in UK grocery retailing, with the existing store network representing a mixed bag of stores ranging from convenience outlets to hypermarkets. The company, which was originally owned by US retailer, Safeway Inc, opened its first outlets in the UK in 1962 and was acquired by the Argyll Group in 1987. The Argyll Group operated a number of food and drinks businesses, best known of which were the Scottish and northern-based Presto and Lo-Cost supermarket banners.

Following the acquisition, Argyll integrated the two retail companies and converted many of the larger Presto stores to the Safeway fascia, selling the Lo-Cost stores in 1994. In the 1990s, Argyll proceeded to sell its non-core businesses to focus on food retailing and in 1996 the company name was changed to Safeway plc with all stores rebranded Safeway.

However, Safeway has always struggled to carve itself a clear niche in the market, which has long been dominated by the likes of Tesco, Sainsbury’s and Asda. In 1999, in an effort to rejuvenate and refocus the chain, Carlos Criado-Perez, formerly a Wal-Mart director, was brought in as chief executive. However, even with his more promotionally driven pricing strategy the chain failed to shake off its high price image and truly compete with the market leaders.

However, what Safeway does have that is of great interest to the other majors is a large store portfolio with nearly 200 superstore-sized outlets – ample potential for conversion to a Morrison’s superstore, Sainsbury Savacentre or Main plus format, or a Wal-Mart Asda superstore/hypermarket – and a similar number of supermarkets.

Given the prevailing planning climate in the UK, which largely restricts new superstore and hypermarket development, Safeway provides a unique opportunity for any of these retailers to significantly enhance their market share and narrow the gap with Tesco. However, with the exception of Morrison’s, which commands around 6% of the UK grocery market (sales of £3.9 billion), both Wal-Mart’s and Sainsbury’s bids would be referred to the Office of Fair Trading as a complete takeover of Safeway would mean that their market share would exceed the 25% threshold. Given this scenario, it is likely that a successful bid either by Wal-Mart or Sainsbury’s would result in the sale of 80 or more stores. Watch this space!
KC's View: