Last year was perhaps the most significant one in UK retailing for well over a decade. The colour and shape of UK retail in 2003 was marked by a series of key issues, which can be divided into news events and retail sector developments
Elsevier Food International, Vol. 7, Number 1, February 2004
Steve Foster

The news was dominated by the "do", bids for the Safeway multiple supermarket chain, which began in January 2003, and now looks to have been won by Morrisons. And then, just to dot the i's and cross the t's on 2003, December saw a series of takeover bids for Londis, a leading independent chain specialising in convenience retailing.
Sector developments centred on the ever-faster move to small format convenience retailing by leading supermarket operators, and Tesco and the Co-op Group in particular. It is somewhat ironic that Government-led restrictions on planning permission to build more out-of-town superstores has led the leading supermarket operators back to the UK's high streets in the search for market expansion. This is creating a degree of polarisation among multiple retailers from hypermarkets to mini-markets. One thing is for certain: retail polarisation will test retailers' supply chain skills and capacities to the full in 2004.
Supply chain demands are also on the increase as the leading supermarket retailers continue to devote ever more space to non-food departments, which offer higher margins than the generally static grocery sectors in the UK. The move to non-food is even seeing the development of standalone outlets such as Asda/Wal-Mart's pilot tests with standalone George clothing stores.

Safeway saga
At the time of writing, the bidding battle for control of Safeway appears to have been won by Morrisons following a £3 billion offer for its larger rival Safeway. Morrisons, the northern England based chain with around no stores, has previously had only a minimal penetration in the south of England, but the acquisition of Safeway will add a further 479 stores, mainly in the south of England, thus creating a new national chain. Other bidders included Tesco, Sainsbury's and Asda/Wal-Mart but their respective market size and strength was always unlikely to gain approval from the UK Competition Commission. Morrisons will have to dispose of just over 50 stores to fall in line with the Competition Commission ruling on the Safeway takeover. The likelihood will be that these stores will be smaller convenience stores and Morrisons may decide to dispose of more than 140 smaller stores.
In the UK supermarket power league, the Safeway acquisition places Morrisons just behind Sainsbury's, which itself trails Asda Wal-Mart and Tesco, the market leader. The Morrisons-Safeway group will have combined sales of more than £13 billion and a projected market share of 15.6 per cent. According to UK stock brokers Seymour Pierce, this will place the group just behind Sainsbury's at 16 per cent, Wal-Mart-Asda at 16.7 per cent, and market leader Tesco at 26.8 per cent. The management task for Morrisons is to marry up a very northern England retail institution with a southern England-centric operation in Safeway. The Safeway bid saga aside, Tesco remains the undisputed league leader in the UK and there are signs that it is pushing further ahead.
Tesco's performance is boosted by it being the only UK-owned supermarket retailer with global retailing ambitions. and by being the world's leading and most profitable on-line retailer through Tesco.com. Tesco is exporting its dot com expertise to the United States through the Safeway US chain. In the world of non-food Tesco launched its own brand of mobile phones at the tail end of 2003.
In its annual survey, UK business magazine Management Today placed Tesco as the UK's most admired company and Tesco's CEO Sir Terry Leahy as the most admired CEO for 2003. This is the first time that both a company and its CEO had won the title in the same year.
As City of London analysts struggle to find holes in Tesco's strategy the only potential blot on the landscape for Tesco would arise if it took its eye off the ball in the UK as it expands around the world. Last year Tesco expanded into the Japanese and Turkish retail markets. But the 'eye-off-the-ball' notion is highly unlikely because one of Tesco's great strengths is that it is a very focussed operation. Tesco is acutely aware that Sainsbury's, for many decades the number one chain in the UK, took its eye off the ball in the 1990s and has paid a price ever since.

Tough market
Sainsbury's continues to face market pressures from Tesco, Asda/Wal-Mart and, potentially, the new Morrisons. However, shareholders will hope that a key appointment will revive the company's fortunes, although it must be remembered that Sainsbury's is still a very profitable concern despite losing market share. Current group chief executive Sir Peter Davis moves to chairman in April 2004 when the group chief executive role is handed over to Justin King, formerly director of food at Marks & Spencer.
King has been credited with the growth of food at Marks & Spencer and the development of its successful and expanding convenience store format Simply Food. King is also a former Asda man, so presumably will have a plan to fight the other majors on price while Sainsbury's is already expanding its non-food lines. Or it is possible that Sainsbury's will try to pitch itself more up-market. Time will tell.
The truth is UK retailing remains as highly competitive as ever. IGD, the UK retail industry body, comments: "The market remains difficult, with retailers facing continued low inflation, rising costs and an increasingly confrontational attitude on the part of politicians, officials, pressure groups and the media. Going forward, ingenuity, innovation and pace will be critical to success for the UK's grocery retailers."
There have been big moves in the independent retail sector, reacting to the multiples' incursions into an area of retailing that has been traditionally dominated by independent groups such as Spar and Londis. Musgrave, the Republic of Ireland-based company, which owns multiple supermarket operator Budgens in the UK, tabled a bid for Londis in the UK in the name of Budgens in December 2003. But a revolt by Londis' 2,000 independent retailers to the offer has seen the bid stalled.
A rival bid could be mounted by Nisa-Todays, the UK's largest buying group with 800 retailers and an annual turnover of £15 billion. Its retail members include Budgens, Londis and Costcutter for whom Nisa-Today's produces private label brands. Booker, which is part of the Big Group company with retail multiple Iceland, has also entered the race for Londis. The idea is to ward off an attack by leading multiples such as Tesco, Asda/Wal-Mart or Sainsbury's. 

‘Combine or die’
The message for independent buying groups in 2004 and the years after is 'combine or die'. "Whatever happens to the 2,000 plus Londis retailers in 2004 is going to have as big an impact on the UK convenience sector as Morrisons' potential takeover of Safeway will have in the multiple sector," says Richard Siddle, editor of UK magazine Independent Retail News. Indeed as a measure of the importance of any Londis takeover, the Londis saga has occupied hundreds of column centimetres in UK national newspapers plus coverage on TV and radio. Siddle points out that the disposal of Londis has taken the independent sector by complete surprise. "Yet consolidation and radical steps of this kind are what is needed if good independents are to have the support and management backup that enables them to compete head on with the likes of Tesco Express and Sainsbury's Local on the high street. We can expect more moves of this kind, more consolidation and more surprises."
Dr Neill Sherrell, director of the SRCG Ltd. consultancy, says: "Leading UK multiples have become increasingly interested in the convenience channel for a number of reasons. The first and most often quoted is out of town supermarket saturation. The ever-decreasing catchment areas open to new stores mean cannibalisation of existing trade, often from the same retailer. Add to this an unwillingness on behalf of local and district councils to grant planning permission and to tie up applications in red tape for indeterminably long periods and this has meant that multiples have had to look elsewhere for the opportunity to continue the growth that keeps the City analysts happy." The moving to the convenience is also a response to a changing UK consumer according to Sherrell. "The convenience channel is now growing faster than the grocery channel. Shoppers are increasingly focusing on one big shop supported by an increasing number of smaller top-up shops. Add to this the growing trend of 'grazin, which is fed by 'on the move' food shopping, and convenience looks like an exciting new opportunity. Retailers recognise this and know they have a strong and trusted brand that can be inserted into a historically fragmented and variably serviced channel," he says.

Asda's c-store option
"Managed properly, convenience offers a real profit opportunity, but only if the right scale can be achieved. Lifestyle changes will continue to drive the convenience cause and with this comes the opportunity to drive profit through an adjustment of the retail mix in small format stores," says Sherrell who tips Asda/Wal-Mart to join the convenience sector sooner rather than later: "Don't be surprised to see Asda/Wal-Mart stepping into the channel soon.
However, Sherrell is not certain that any of the new multiple operators have achieved the scale to say that they are truly making money out of the c-channel yet. "Certain attributable costs may be moved around to dress the picture up. However, Tesco with the purchase of T&S One Stop has the opportunity to reach the end of 2004 with a full-scale convenience operation, as they follow an aggressive conversion campaign, which can see sales doubling overnight in those stores. "
Innovation is critical in convenience retailing but Sherrell adds that product and packaging innovation by suppliers is also a critical element and is currently missing in the UK. "How many truly convenient products were launched in the UK in 2003?," he says. "The Heinz microwaveable soup cup is the only one that springs to mind. This innovation allows the same product to be sold for three times its standard 'tin' price because it is something shoppers want, can see the benefit of and will pay a premium for.
As EDLP takes hold in grocery, suppliers must recognise the opportunity that convenience offers says Sherrell. "It is no longer a backwater channel where profit can be made through a cash cow mentality, Indeed it may soon be the only opportunity for suppliers to make real money, but only if they raise their investment substantially and truly understand and direct retailer and shopper needs in this channel." Looking further ahead, the introduction of the euro to the UK has been on the horizon for a few years but its advent in the UK seems to rise and fade as much through world politics as through fiscal and economic arguments. If the UK signs up to the euro then Tesco would be in a good position with operations in the Republic Of Ireland, and operations in prospective EU countries in eastern Europe such as Poland, Hungary and the Czech Republic.
Fierce price competition among the multiple supermarkets has kept the discount sector at bay. The UK is not a discount-led country despite the presence of Aldi, Lidl and Netto, This is partly due to the very aggressive pricing policies of the major supermarket operators, and partly because the UK has no great tradition of discounting among consumers, The psyche of thrifty shopping is nowhere near as keen in the UK as in Germany or in the United States for example, It is not unheard of to see a discounter's shopping bag hidden in a Tesco or Sainsbury's bag.
The year 2003 may well prove to be a highly significant year in the history of supermarket retailing in the UK, but the first full effects will be seen this year and in the years ahead.