Fresh start or end of line for Somerfield?

Has new chief executive Alan Smith been called in to smooth Somerfield’s move into convenience retail or to wind up the brand?

Somerfield has had a grim couple of years since it took over Kwik Save in 1998, and last week the chain’s board decided the architect of the deal, chief executive David Simons, must pay the price for its failure.

His enforced departure, and replacement by former Punch Taverns executive Alan Smith, raised initial speculation that the new man may have been brought in to close the doors on the chain once and for all. One analyst said: “It may be that he is there only to oversee the winding up of the business. He doesn’t have any food experience.”

But it has been revealed this week that he will be partnered by John von Spreckelsen, the retailer who turned around Budgens, which suggests that Somerfield may be ready to make a go of the revival strategy put in place by Simons.

Smith joined the ailing supermarket on Monday amid fears that its falling sales are expected to drop even further. And as Somerfield’s value continues to plummet following the disastrous Kwik Save takeover, Smith and von Spreckelsen face limited options. The City reacted to Smith’s appointment by downgrading shares even further: the price dropped below 50p for the first time, compared with a flotation price of 175p two years ago.

After three profit warnings in the past 12 months, Simons announced a strategy overhaul, which meant selling off 500 large Somerfield and Kwik Save stores to concentrate on convenience retailing. But the sell-off has stalled, with the bigger players cherry-picking the best sites.

Sales have failed to improve. One analyst says: “A company does not sack its chief executive if sales are showing signs of improvement. The City took it as a sign that things are getting even worse.”

The marketing director of a rival chain says: “It is dead in the water. It doesn’t have the store portfolio to compete with the big players and has even sold off its best stores.”

Some say Somerfield’s desired portfolio of medium-sized outlets, mainly in high street and country town locations, will fit its strategy of moving into convenience store retailing. Retail Intelligence analyst Richard Perks says: “The future is the one David Simons gave it, which is as a convenience store chain. It has bigger resources than c-store chains and could offer a good range of ready meals, which is the way the market – as shown by Sainsbury’s Local chain – is moving. That has to be its strategy in the long term. It has the portfolio and it makes sense to have a home shopping service in parallel with a high street convenience chain.”

Perks refers to Somerfield’s home shopping division, 24-7, which claims the second-largest van fleet in the country after Tesco. The service places Somerfield high in a new world order of home particularly Internet-based retailing, which could bring long-term returns.

One industry insider says: “Tesco and Sainsbury’s are returning to the high street as sales growth becomes harder to achieve elsewhere because of competition and planning restrictions. But the slow roll-out of Local and Express respectively suggests they are finding it hard to make the economics work.”

The logistics of running an effective, small store-based food operation are hard to achieve for businesses set up to sell in large stores, where delivery times and stock procedures are fine-tuned. Yet, though the big players have struggled, Somerfield may be able to carve out a niche.

There are few choices beyond c-store retailing. Financial experts say a securitisation deal, in which bonds can be sold on the strength of the regular payments from lease options, may be possible. The money could be used to fund growth through expansion and, possibly, on another attempt to revive the Kwik Save brand. But supermarket sales are too management-sensitive to securitise and Simons’ bungled attempts at rebranding Kwik Save have, for many, written off any future success for the brand.

There is speculation that Smith is in the post only temporarily, and that his aim may be to take the company off the stock market. At Punch Taverns, he helped oversee, with founder Hugh Osmond, last year’s audacious takeover of Allied Domecq’s pub division from under the nose of Whitbread. Before Kingfisher, he was with off-licence chain Victoria Wines, and before that Allied Lyons.

One source says: “There is some uncertainty as to whether he is moving from Punch Taverns or whether he was moved out.”

Whatever the circumstances of his arrival at Somerfield, or the nature of his role, he has accepted leadership of a company in turmoil. As one source says: “It must get shot of the Kwik Save business and try to walk away from any lease options – it has to get out clean.”

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