My poor, long suffering, husband had to listen to a lecture on this very subject this morning so here goes, for another, equally long suffering audience -
This was, as George said, the best possible decision for consumers in lots of ways. First off, for those whose priority is (or has to be) cheap food, Morrisons' formula is closer to the value and keeping-prices-down system than Safeway's has been. Both companies have a reputation for pretty good quality, though, so will hopefully give Asda and Tesco a run for their money where cheap is ultra important, quality less so (purely in my own personal view, that is).
Secondly, the 53 stores to be sold off are in very good locations for either Waitrose or Marks & Spencer. They are probably a better size and therefore bet for Waitrose but either purchaser would be a reasonable one for consumers as they are the last of the "quality" grocers. At the top end of the market, for those willing and able to pay a bit more for their food and to expect reliability and innovation, this is yet another good thing. Should any of the big three get them, though, I would be disappointed as it would be more in the way of spoiling tactics and greed than anything constructive.
Thirdly, as for Mr. Green and his ambitions, I'm inclined to agree with the analysts who suggest that he needs a grocery arm to support his clothes and general retail interests largely because the bigger supermarkets are extending their non-food lines so aggressively. While he may have gone into the whole process with the thought of breaking up Safeway and making quick profits, this option has been closed to him and I suspect something similar would happen if Tesco, Asda or Sainsbury's tried to buy large chunks of any other chain that he decides to gobble up and spit out. So buying in for the longer term might just be a better option for him and everyone else.
Finally, before I put the proverbial sock in it, this also leaves the field pretty wide open for more and more small, convenience stores to open in town centres (where they were originally forced to close by supermarkets building outside of the towns) which is also to consumer advantage. What goes around, comes around as they say.
Bernice Hurst, Managing Director, Fine Food Network - Braintrust Panelist
The Morrison bid represents a fundamental change for UK vendors. However, far from being the
beginning of the end, Friday's Government announcement merely signalled the end of the
beginning...
First comes at least a month of negotiating the precise criteria for a 53-store disposal programme
with the Government.
A formal bid will then be prepared, calculating that an eventual price of £3.5Bn will probably have to
be paid in order to secure the cooperation of key Safeway staff, without whose enthusiastic support
everything is academic...
Morrisons will have to factor this final price into the mix of cost savings (supply and de-duplication
economies) and synergies required to avoid diluting their historic financial performance. For the
benefit of those vendors previously focused on the traditional top 3 grocery multiples, this 'minor
player' has been consistently delivering the best financial performance in UK grocery retail over the
past ten years. Key indicators include ROCE of 21%, Net Margins of 6.4% and Stockturn of 31 per
annum, latest.
Both the City and Morrisons will not tolerate more than a one year delay in restoring any ‘period of
adjustment’ shortfalls. Otherwise Ken Morrison could sacrifice a lifetime of autonomy...
In plain language, making this knife-edge offer will take up most of the 21-day limit imposed by the
regulators.
Meanwhile, vendors will find it difficult to maintain Morrisons' attention-span for anything more than
basic discussions on price and store-level performance.
Having submitted and gained acceptance of their bid, Morrisons will then be preoccupied with a
search for a good price for the ‘surplus' stores, within the government restrictions now in place…
Think of the enormity of the task then facing the Morrisons team:
• Integration of systems, people and logistics of two companies poles apart in terms of size, focus,
transparency and culture, without alienating the workers
• Changover of facia and offer to EDLP, without alienating the Safeway customer-base, and not
being able to miss a beat in the process
• Re-negotiation of total relationships with 1800-2000 suppliers, resolving trading ‘anomalies’
arising from their due diligence discoveries, without alienating their hardcore sources of brand
and private-label supplies
• Maintaining City relationships, in terms of setting, meeting and managing expectations, without
alienating the money-suppliers
With luck, Morrisons will emerge from the tunnel a year later,
‘ready’ to defend its new No. 3. position in the market. In the meantime, it will have to use price to
communicate effectively with its new market.
Meanwhile, however, the UK trade show has to
go on...
Tesco and Asda will fight for market leadership, each using the plain language of EDLP, without
the distraction of serious competition from the new No3 & 4 UK players.
Sainsburys, meanwhile, will have to use price in an attempt to redefine itself and gain market
share within the bid-window provided by the government. However, given that the DTI outcome has
been ‘inevitable’ for at least six months, and Sainsburys have been unable to capitalise on the
opportunity thus far, it follows that it is unlikely that the company will be able to recover the situation
sufficiently by the time Morrisons is able to apply some of its new muscle.
In plain language,
we believe that we are about to enter the longest, most aggressive UK price war ever, where
relationships and brand initiatives will be tested against highly focused financial criteria, and little
attention given to anything other that onshelf/offshelf performance.
Brands will still be crucial, but their potential contribution to retail performance will have to be
expressed in very plain language, fast.
Brian Moore, MD, EMR-Namnews Ltd
