The deal was no surprise – the process has been dragging on for months and, while the actual price of£1.57 billion was a lot less than first touted, all parties seemed satisfied.
But it was not just the fact that the deal was a foregone conclusion that meant the news passed without a fanfare. Most retail commentators said that, although the deal propels the Co-op back into the major league, the big four retailers will remain unfazed.
Sanford Bernstein analyst Chris Hogbin said the combined group represents little threat to the UK’s food retailers and, further, the competition may well benefit from any weakness in trade during the integration process.
Co-op chief executive Peter Marks might have talked of the need now to refer to the “big five”, but he has an incredibly long way to go before he achieves that feat. Both the Co-op and Somerfield serve older customers from smaller stores with a fairly limited assortment and limited private-label penetration. The Co-op’s prices are also on average about 15 per cent higher than the big four’s.
Marks has done well developing the Co-op, swallowing up a series of smaller co-operatives and completing its mega-merger with United Co-operatives last July. And gaining Somerfield will give it the scale it needs to compete with big boys.
Yet it is not just store numbers that Co-op needs to belong to the big five. Grocers Tesco, Asda, Sainsburys and Morrisons are incredibly competitive and the nature of the co-operative business will make it hard for it to keep up.
If the Co-op wants to be in the big playground, it needs to sharpen up its value offer. The past few months have shown that shoppers are extremely disloyal when it comes to grocery shopping and will make a choice on where to go based purely on its promotional activity. The Co-op would do well to sharpen up its convenience -store format, finding out exactly what those local customers want and making sure everything is there for them on a plate when they rush in at the end of a busy day. If it tries too hard to be the next Tesco, it will get shot down on price and range.
There is a lot of scope to make the Co-op more efficient by adopting some of the Somerfield operating models, and Marks is likely to close the Bristol head office once the integration is completed. After that, Co-op should be a leaner machine, but it will have to continue to think partly in the Somerfield private equity, aggressive way in order to gun after the big four.
But what will probably set the Co-op apart will be its ethical trading and local format – if it forgets this, it may well continue to flag behind its rivals in much the same way as Somerfield did for many years.