Kwik Save plays the regeneration game

Kwik Save is preparing to launch New Generation, an attempt to move upmarket which will pitch the retailer against both the superstores and its discounter rivals. But is it overreaching itself?

Kwik Save’s turnstiles have got to go. Entering one of the discount chain’s stores is like trying to get into a third division football match. And that’s if the Kwik Save turnstile is working. If not, you may have to scramble through the trolley entrance. Hardly a friendly welcome to a supermarket, and a stark symbol of all that is wrong with the chain’s stores.

This month, Kwik Save swings into action with its much trumpeted plan to improve stores and turn round declining profits. With former Kraft marketing chief Phil Smith at the helm, Kwik Save is about to embark on the supermarket relaunch of the decade. You can almost predict the new advertising – through McCann-Erickson Manchester – soft focus filming of smiling young families only too happy to get down to Kwik Save. However, Smith refuses to give any details of the supermarket’s plans.

In the past two years, Kwik Save has suffered from falling profits. Last year, they tumbled from 125.5m to just 2.8m because of an 87.5m exceptional charge for store disposals. Its share price has more than halved over the past year to about 3, and its operating margins are wafer thin at only 1.9 per cent, compared with more than four per cent at the beginning of the decade.

The supermarket chain is working on a new “upmarket” format for its stores under the title of “New Generation”, and this month will start trials of three or four variations. They will take some of the ideas from superstore rivals – brighter lighting, lower shelves with more emphasis on fresh food. Kwik Save will take its fresh food concessions in store in an effort to improve its margins.

Andersen Consulting is advising on the direction the company should take. Already it has given a new meaning to the phrase “a penny for your thoughts”: it is charging Kwik Save an estimated 8m. But the changes that Andersen is instigating may cause a domino effect across the food retail industry, which some believe could eventually rebound on the chain itself.

There is a disposal programme of the worst performing 100 stores out of its portfolio of more than 900. At the same time, the chain’s launch of a higher quality own-label range, to sit alongside its No Frills economy range, will mean that many second and third-line brands will disappear (MW February 28).

But the question for the chain is whether these New Generation stores will help improve profitablility and lead it out of the gloom surrounding it. It is squeezed in the middle of the food retail market between the superstores with their wide ranges and customer service at one end, and the hard-nosed foreign discounters with fewer lines and lower prices at the other.

Before delivering its recovery plan to the City last November, analysts thought Kwik Save had two options. Either it could take on the superstores, or it could reinforce its low price position against the discounters. But Kwik Save is trying a third strategy by expanding on both sides.

It is taking the risk of overstretching itself and losing out in both areas. Steve Davis, analyst at Corporate Intelligence, says: “It is trying to combine the best elements of the superstores with the price promise of the discounters. The flipside of being squeezed on both sides is expanding on both sides, but it is a difficult trick to pull off.”

The new look Kwik Save stores are designed to alter consumer’s fundamental perception of the chain. For the past 25 years it has been the place where shoppers can buy top brands at low prices.

“The own-label launch is interesting, but high risk – there is a question mark over whether Kwik Save customers will react positively to own-label ranges when they have become accustomed to branded goods,” says one analyst. “The jury is out – Kwik Save’s heritage is about top brands at low prices – will the quality perception of the own-label range be sufficient?”

He suspects the launch could ignite an own-label price war with rival supermarkets, which Kwik Save is not well placed to win, as it has little margin for reducing prices any further. And he believes that the chain may have missed a trick by failing to extend its discount formula to other areas.

It is understood that it will increase its range of toiletries, but there are other areas that could benefit from the Kwik Save treatment – such as newspapers and magazines (which are currently on trial), clothing and hardware.

The sale of 100 stores, some have already gone, raises the question of who is going to buy them. If they are sold off piecemeal, the process could take a long time – during which they will continue to eat into Kwik Save’s declining profits. But if they are sold off in batches, a discount rival such as Aldi, Netto or Lidl could snap them up, further adding to Kwik Save’s problems. A deadline of August 1997 has been set for the sell off.

The recovery plan the supermarket is putting in place could take two years to feed through. But if it fails to improve the chain’s profits, its majority shareholder, Dairy Farm International – which owns a third of the company – may decide to sell. Some analysts believe the chain could be ripe for takeover, possibly by one of the foreign discounters, with Aldi tipped as the favourite.

The revitalised Kwik Save is crashing onto the supermarket scene at a time when many of the initiatives put in place by its rivals last year are running out of steam.

The push into loyalty cards started by Tesco in 1995 has now been completed, with the top three grocers all boasting their own schemes. Loyalty cards have become something they can’t do without, rather than an aggressive way of building market share. Loyalty was last year’s watchword. Likewise, the Unbeatable Value campaign, launched by Tesco in November, seems to have run its course.

There is something of a marketing vacuum this spring. Asda will be filling it with its Value Cannonball programme, attacking rivals’ loyalty cards and reportedly cutting prices on some 200 lines. Perhaps the other grocers are waiting to see exactly what Kwik Save comes up with before making their next moves.

It will take more than getting rid of a few turnstiles, slapping on a lick of paint and a belated entry into the own-label market to sort out Kwik Save’s problems. Much will depend on the activities of the superstores and on whether the discounters will be able to overturn planning problems and extend into the South-east, the West, Wales and Scotland. By expanding in two directions, Kwik Save is placing itself in the vice of two opposite sectors.

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