Why Somerfield depends on Tesco’s slipstream for lift-off

As the battle between the supermarket multiples escalates, George Pitcher considers the opportunities for a newly floated Somerfield. George Pitcher is joint managing director of media consultancy Luther Pendragon

There is something faintly unsettling about the photographs of top grocers at their checkouts which appear in the newspapers. Like finding the Duchess of Kent in the queue for the lav at Wembley. One feels that they should know their place – up there in the boardroom or in the Royal Box, leaving us plebs to get on with what we do, be it the call of nature or shopping.

So I’m not sure that it’s a good idea to have Tesco’s chairman, Sir Ian MacLaurin, turning out at the Hatfield branch – the nearest, presumably, to Tesco’s austere HQ – for a photo opportunity of him using the new, improved Tesco Clubcard Plus.

Nevertheless it did distract some attention on the Telegraph page on which I saw his grinning visage, from the display advertisement below telling us “Now you can have a slice of Somerfield”. We are told that “with over 600 stores and sales last year of more than 3bn, Somerfield is one of the leading food retailers in the UK”. We can apparently apply for shares in the forthcoming flotation of Somerfield at the likes of Barclays Stockbrokers, Sharelink and the Skipton Building Society.

You will have guessed that I consider there to be a link, rather than simply a juxtaposition, between the Tesco story and the Somerfield ad. But more of that in a moment. First, a word about Tesco and loyalty cards.

By common consent, Tesco has stolen a march on its rival, Sainsbury’s, with its Clubcard initiative. I have no reason to doubt that this is true. Tesco has clearly pushed ajar the door that leads to financial services by paying five per cent interest on accounts held in credit and charging just nine per cent on overdrafts, albeit with the assistance of a small bank called NatWest.

Sainsbury’s originally called Tesco’s initiative an “electronic Green Shield stamp-style scheme”, which I took to be a pejorative comment. But it was clearly an endorsement and a compliment, because Sainsbury’s has followed suit with its Reward Card, a somewhat tardy contribution to the loyalty market.

Sainsbury’s has attempted to shave some of the competitive edge off Tesco’s offer by awarding one loyalty point per 1 spent, against Tesco’s one point for every 5. It must only be a matter of time before the financial services element of a plastic card also appears on Sainsbury’s Reward Card roster.

Whether Sainsbury’s can afford to do so is a moot point. Analysts estimate that Sainsbury’s sales must rise by some 2.5 per cent from last year’s 10bn to pay for the expense of the Reward Card as it stands. It could achieve that quite plausibly. What is harder to contemplate is Sainsbury’s doing much better, in turnover terms, than 2.5 per cent.

Consequently, adding the whistles and bells of financial services could prove costly.

And there is no telling whether Tesco will turn the screw by improving its own offer. A little over a week ago, Tesco was telling us that like-for-like sales were up seven per cent for the first 14 weeks of the current year.

What isn’t taken into account is the strain on both Sainsbury’s and Tesco of the battle for custom on their new petrol forecourts. It is undoubtedly the case that the push for petrol customers is taking its toll on margins. Neither store chain would wish just now to have to enter too costly a battle for market share within the store itself.

Which brings me back to Somerfield, that conglomeration of Gateway and other bits and pieces that is emerging Phoenix-like from the ashes of Isosceles. It should serve as a cautionary tale to any young venture capitalist tempted to buy business at any over-leveraged cost.

The first thing to say about Somerfield is that it comes to market under relatively benign circumstances. Precisely because the big four supermarket groups – Sainsbury’s, Tesco, Asda and Safeway – are tied up with petrol wars, the pricing environment on groceries isn’t as bad as it might be. As for supermarket shares themselves, the prospect of a Labour government will lead investors to defensive sectors such as food retailing, which should assist Somerfield’s flotation.

The next point is whether Somerfield will be inclined to pursue financial services after its flotation next month. There are issues concerning running before walking here – the shadow of a 2.1bn buy-out that wrote off some 800m in bank debt, plus the banks’ equity, is unlikely to endear Somerfield to those who might back something so adventurous. Somerfield will still be carrying some 200m in debt, against a market value of 700m.

Still, the flotation will be raising about 525m and, as I say, those flotation ads in the newspapers mention a range of retail stockbrokers, while the issue itself is sponsored by Kleinwort Benson and its flotation stockbroker is NatWest Securities.

Of course Tesco is already in bed with NatWest on the matter of supermarket banking. But, with all that financial services talent at its disposal, Somerfield would be missing a trick – especially as it can’t compete on brand, petrol or out-of-town superstores – if it didn’t look at the possibility of hitting its rivals early and where it hurts.

It would at least be entertaining – soon we’ll be laughing all the way to the supermarket.

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