There’s something about the proposed merger of off-licence chains Victoria Wine and Thresher which simply doesn’t add up. That, at least, is the opinion of some leading City analysts.
At first glance it’s hard to understand what the problem is. The merger seems like a neat rationalisation. Allied Domecq-owned Victoria Wine and Whitbread-owned Thresher appear for the most part complementary businesses.
Neither has been an outstanding performer lately. Victoria Wine’s operating profits fell to 2m in the year to August 1997, a 3m fall. Thresher saw profits rise by six per cent in the year to February, but this was on a turnover which declined by one per cent.
The merger will take the form of a new holding company split 50/50 between parent companies Allied Domecq and Whitbread. It will dovetail the holdings of the two chains, giving the new company 3,000 outlets across the UK, annual sales of 1.3bn and combined assets of 260m.
More importantly, the new company will have a market share of about 14 per cent. That may be enough to compete head-on with Tesco and other supermarket chains which have dominated the take-home drinks trade in recent years. As a result of the deal, over 300 stores are to close and 1,000 jobs will be axed. This will reduce duplication and remove weak performers, generating cost savings; both Allied Domecq and Whitbread are remaining tight-lipped about the precise scale of these savings. Similar savings are anticipated from the greater buying power of the new company.
Marketing will be the responsibility of Thresher marketing director Ralph Hayward (MW August 20).
When the merger was announced, Jerry Walton, managing director of Thresher, said: “The take-home drinks market is attractive, but has been led by supermarkets which have used their scale to achieve efficiencies and thereby build their market share. To compete effectively, a similar scale is essential.”
But there is a conundrum. Why do companies like Allied Domecq and Whitbread want to compete more ferociously with supermarkets when they are also major suppliers of the liquor sold in them? Isn’t that biting the hand that feeds?
There is the opposing argument that by ratcheting up sales in their own stores, the companies will be able to resist the ever downward price pressure applied by supermarkets. But analysts remain dubious about the ability of the merger to compete with the likes of Tesco.
They say supermarkets have an instant advantage because of their greater diversity. People go to them not just to buy alcohol but to buy food. The purchase of alcohol is part of the weekly shop. Unless the new company has something up its sleeve, it is unlikely to give the supermarkets much of a headache.
“If they are looking to compete just on price, I don’t see that as a viable strategy long-term,” says one analyst.
Both Allied Domecq and Whitbread are cryptic about their plans. Speculation, however, divides down two paths. The first is that the new company will be an innovative, experimental, think-tank that has been formed to try initiatives the parent companies didn’t dare try on their own.
Another analyst says: “I expect to see a lot of changes. There is no point in them knocking their head against the likes of Tesco. I think there is something more to it. The management (of the new company) is going to be given the opportunity to do some fairly leading-edge retailing. It ‘s going to have the muscle to do quite a lot in the industry. It’s going to try improving margins. But most of all it will attempt to offer what Tesco can’t.”
Some believe the new company will concentrate on the sophisticated end of the market. It will develop more wine clubs and specialist shops for wine-tasting.
In this scenario, the company would presumably compete on cheap, bulk sales only in areas where its existing off-licences are already strong performers.
Clearly this has implications for brands. Victoria Wine trades as Victoria Wine Cellars, Haddows, Martha’s Vineyard and Firkin off-licences. Threshers trades as Wine Rack, Bottoms Up, Thresher Wine Shop, Drinks Cabin and Huttons. Allied Domecq and Whitbread say they have yet to decide what to do with each brand, although some brands may have to go.
One area of business Allied Domecq and Whitbread have flagged for development is mail order and Internet sales.
David Howes, communications manager for Thresher, says: “That’s something both parties have been exploring and have been doing very well. If more customers want to buy things virtually, we will be there selling to them.”
Victoria Wine launched Cellars Direct in July 1997. It’s a home shopping service for wine which works in a similar fashion to Interflora. Customers phone a freephone number and order their wine, which is delivered free of charge. Threshers has a similar scheme and it has been on Line One’s Internet shopping zone since April.
Analysts point out that increased mail order and Internet sales reduce the need for retail outlets. This could give the new company room to reduce costs and increase margins. It would of course still be competing with supermarkets which themselves are becoming increasingly aggressive in the virtual world.
That’s the upbeat interpretation of Whitbread and Domecq’s intentions among analysts. There is, however, another view.
“I think this could be a precursor to Allied Domecq and Whitbread leaving the market,” says one. “The off-licence business is in decline. The economics mean it could be handled better by someone else.” Both companies deny this is the plan. “Quite the reverse,” says Allied Domecq spokesman Robert Humpreys.
But there’s no escaping the fact that the merger does present a stronger, tidier company ready for sale. Victoria Wine is thought to have been up for sale anyway. Allied Domeq and Whitbread may consider selling off the combined concern to a supermarket chain, other off-licence retailers, or a management buyout. Or perhaps a stock market flotation.