Morrisons – safely on its way?

It seems that the fate of supermarket chain Safeway has been sealed following William Morrisons’ &£3bn offer for the chain, made just before Christmas. It signals the end of a year-long takeover battle for the supermarket.

The deal has yet to be finalised, but it’s set to change the landscape of the UK’s &£80bn supermarket and grocery sector. The battle to be in the top three has just got tougher.

The latest figures from consumer data company Consodata show that the average monthly spend on the main grocery shop is &£198.81. This data is based on selected supermarkets and weekly spend. Tesco is the market leader with a 31 per cent share, Asda is in second place with a 25 per share and Sainsbury’s trails behind with a 14 per cent share. However, the average spend at Sainsbury’s is &£203.07, nearly &£5 more than the average. Safeway has just nine per cent share, with the average monthly spend estimated at &£194.59 – &£4 less than average.

This reflects a steady trend for Tesco, which has consistently achieved a 30 per cent market share over the past two years. Asda has risen from 21 per cent in 2001 to 25 per cent in 2003, probably due to the supermarket concentrating on non-food items such as its George clothing brand, DVDs and CDs.

Sainsbury’s, however, has shown a gradual decline from 17 per cent in 2001 to 14 per cent in 2003. The supermarket chain has not changed its store format to the same extent as Tesco and Asda, which have both extended their non-grocery sectors.

The location of Sainsbury’s stores may also be contributing to its decline. The chain is over-represented in the South-east – 56 per cent of its business is in this region – yet the South-east only accounts for 31 per cent of Sainsbury’s total grocery sales. This means that the chain is missing out on sales because it does not have an even spread of store locations.

Morrisons has a similar problem in that it is over-represented in Yorkshire and Humberside. The region accounts for 39 per cent of Morrisons’ sales but just ten per cent of the overall grocery market. The average monthly spend at Morrisons is &£198.04, which is in line with the overall average monthly spend but higher than the average spend at Safeway. Morrisons may have a smaller market share than the giants, but it is for this reason that it is able to bid for Safeway.

The Safeway portfolio complements Morrisons’ because Safeway has a strong presence in Scotland and the South-east – areas where Morrisons is traditionally weak. The acquisition of Safeway would give Morrisons a more even geographical spread of stores, enabling it to establish itself in previously unrepresented areas. Even if it is not allowed to buy all of Safeway’s stores, Morrisons should be able to level off its dependence on the North.

The acquisition of Safeway, or even part of it, is likely to put Morrisons ahead of Sainsbury’s as the third-largest grocery retailer in the UK. Morrisons will likely rationalise its portfolio to avoid duplication.

Sainsbury’s, on the other hand, will have to concentrate on local store marketing to counter Morrisons’ encroachment. This could be through direct marketing targeting former Safeway customers who don’t fit the Morrisons’ profile.

Morrisons is over-represented in the 25- to 44-year-olds group, while Sainsbury’s has a much older profile of 45- to 64-year-olds. Sainsbury’s shoppers also tend to be more affluent and are twice as likely to earn &£40,000 a year than average, and are significantly less likely to earn less than &£20,000. The average Morrisons shopper earns close to the national average salary and is more likely to be a manual and factory worker. This means that there will be some shoppers, such as middle and senior managers, currently using Safeway who will be more comfortable shopping at Sainsbury’s than Morrisons.

Therefore, Sainsbury’s should be targeting customers in catchment areas between Sainsbury’s and the new Morrisons stores to attract those shoppers who are likely to be “turned off” by the idea of shopping at Morrisons.

Further major acquisitions are likely to be blocked by the Competition Commission in the future, which means that supermarkets will have to seek growth within their existing portfolio. This may mean extending into the convenience sector (this is already happening with the likes of Sainsbury’s Local outlets, for instance), in the online shopping sector, or the non-food markets such as clothing, electrical and pharmacy. Growth could also come from taking market share from competitors. Because acquisition is an unlikely route for this, more probably it will come through direct marketing activity and listening and responding to customers.

Morrisons’ challenge is to retain Safeway customers. To achieve this it will have to absorb much higher costs than it has previously been used to and will need to start a strategic roll-out of rebranded Safeway stores, which will be logistically challenging.

Every square inch of the UK is included in a supermarket catchment area; there are no gaps for retailers to fill with new stores. So the battle for third place will ultimately rest on distribution of stores, development of non-grocery sectors and brand allegiance.