The Co-operative Group confirmed the grocery sector’s worst-kept secret this week, when it said it was in talks to acquire 900-store local grocery chain Somerfield.
Co-op chief executive Peter Marks said there was “still a lot of work to do”, but added: “We would hope to bring this to a conclusion by the summer of this year.” It is understood that a deal could be done as early as June, but the two sides still have to agree a price and there could be some tough negotiations ahead.
But what is the likely outcome of the Co-op acquiring Somerfield? While Marks declined to comment on store disposals, Co-op is thought to be keen to get rid of a substantial number of Somerfield’s larger stores. Co-op has made no secret of its strategy to focus on the faster growth of the convenience market.
For a handful of stores in the best locations, there will be no hot competition. All the big four, as well as retailers such as Waitrose, Iceland and Marks & Spencer, are understood to have expressed an interest in certain stores. However, there is also a rump of the Somerfield estate that few are interested in.
And, given that the Office of Fair Trading will almost certainly check out the acquisition on competitive grounds, it could be a few years before the true size of a combined Co-op and Somerfield estate becomes clear. On paper, if the Co-op acquired all of Somerfield’s stores, it would increase its market share to about 8 per cent. Somerfield has a 3.6 per cent share of the market and the UK Co-ops combined have 4.4 per cent.
As yet, it is unclear what the Co-op will want to do with the Somerfield brand, but the smart money will be on it being consigned to the grocery mortuary eventually. While chief executive Paul Mason and his team have done a decent job of reviving the Somerfield brand, it’s fair to say that it’s one of the weaker ones in the sector.
What’s more, given that Co-op plans to convert the stores of United Co-operatives to its own brand, Somerfield stores are likely to become an endangered species, although their final extinction could be several years away.
Certainly, the Co-op – which this week posted operating profit up 35 per cent to£322.7 million in the year to January 12 – is a far more confident beast these days. Marks said that it intends to spend£1.5 billion over three years to transform its retail estate under a single, unified brand.
Peter Marks is long enough in the tooth – despite still playing in a rock band – to realise that it won’t be easy stitching another big chain into the fabric of the Co-op. Aside from merger fatigue – Co-op only started the formal integration of United Co-operatives last summer – there are bound to be tough negotiations with employees and unions about some job losses. And that’s before taking into account talks over moving Somerfield’s Bristol staff up north.
However, in the long term, Co-op’s acquisition of Somerfield makes sense. Not only will it give it greater buying power and other economies of scale, but Co-op might not get another opportunity to buy such a large number of stores for a long time.
If a deal is done – and there is no guarantee it will be – then Marks and the Co-op will be proven right eventually.