UK: Food wars - competition in the supermarket sector. (3 of 5)

UK: Food wars - competition in the supermarket sector. (3 of 5) - It is generally thought that there are maybe another 200 good sites for large supermarkets in Britain. Sainsbury, with £750 million to spend this year, Tesco with near £1 billion and Safew

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Last Updated: 31 Aug 2010

It is generally thought that there are maybe another 200 good sites for large supermarkets in Britain. Sainsbury, with £750 million to spend this year, Tesco with near £1 billion and Safeway with £450 million each plan another 20 stores per year; Asda, which has just lost its chairman and chief executive prior to a rights issue, is preoccupied with conversions of its 60 former Gateway stores. But bring in Kwik Save, Waitrose and Morrison and you are looking at another three or four years before customer pools start rubbing uncomfortably. There is little more market share to gain from the independents and growth in the overall food market is stagnating. Soon expansion will have to be by cannibalism among the big 10.

So the question arises: on what basis will retailers compete then? Once a lettuce is crisp, green and almost leaps off the shelf, how much more can you compete on quality? When you all have sufficient parking for the seventh armoured brigade, a quality own brand, 20,000 delectable products and a competitive price, what next?

There are several possible answers to that question. Pricing may become keener. One store style may prove more popular than another: for example, the food, clothing and household goods Asda style versus the mainly food, 18,000-range Tesco versus the discounted, 2,200-product Kwik Save. Or muscle may rule the day. Sainsbury or Tesco, possibly in league with an overseas partner, could bid for a smaller group. Goldman Sachs analyst Philip Dorgan points out that Tesco's recent £1 billion fund-raising exercise leaves it with enough cash to continue expansion and at some point make a large bid. Or the retail giants could choose to rest easily shoulder to shoulder and consider diversification into other retail areas or overseas.

Several of these possibilities could occur in tandem, peaceful co-existence being the least likely. The return on capital from British food retailing, at 20% plus, is highly attractive and less risky than entrance into new areas. Sainsbury's Tom Vyner, while declaring that in his view the saturation of Britain's market is "a million miles away", points out that Sainsbury has already set up its diversification programme with Shaw's supermarkets in the US and Homebase DIY and Savacentre in the UK.

Asda's joint managing director Richard Harker plumps for the "best store format wins" outcome. "The long-term benefit will be with the one that satisfies the customer," he says, outlining Asda's aim to fine tune its merchandise to fit the needs of local customers. He believes that saturation of the market will be gradual, with plenty of scope for "replacement of existing sites by new, better models, that may or may not be run by the existing management". The room for takeover bids would, however, be limited by MMC concerns over market concentration.

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