Can The Co-op make a quick success of the Somerfield merger?

The Co-operative Groups 1.56bn takeover of Somerfield last week gives the retailer added fire power in its battle for the high street pound. Now the pressure is on Co-ops recently installed senior management to prove it can stage a comeback for the group, which was once the UKs biggest grocer.

F1_120The Co-operative Group’s £1.56bn takeover of Somerfield last week gives the retailer added fire power in its battle for the high street pound. Now the pressure is on Co-op’s recently installed senior management to prove it can stage a comeback for the group, which was once the UK’s biggest grocer.

With a £50m advertising relaunch planned for early next year and a £1.5bn programme to refit its 2,200 existing stores under way, the Co-op is in the midst of the biggest makeover in its history. Acquiring and converting the troubled Somerfield further ratchets up the pressure and will test management’s resolve and business acumen.

Some wonder how easily the Manchester mutual will digest the acquisition, which hikes its food sales to £8bn and doubles its grocery market share to nearly 8%. Converting Somerfield’s 880 stores to the Co-op’s fascia and combining the tasks of head offices in Bristol and Manchester is a massive task with wide scope for glitches.

A number of previous retail mergers have proved problematic – Morrisons’ takeover of Safeway led to years of chaos before it came right, while Somerfield had serious problems integrating Kwik Save stores. Then again, Tesco’s acquisitions of convenience store chains over recent years have been smoothly executed. Perhaps converting smaller stores is easier than switching ownership of a chain of superstores.

The Office of Fair Trading will look at competition issues in local areas thrown up by the deal and some believe that the Co-op could be required to offload up to 200 of Somerfield’s superstores and larger outlets. There are suggestions that Somerfield’s head office in Bristol could close with back office functions moving to the Co-op’s Manchester base.

This could take about a year and lead to as yet unspecified job losses. Converting the stores could take a further two years or more.

The acquisition is likely to be cleared just as the Co-operative Group introduces the biggest marketing relaunch in its history. The £50m advertising campaign through McCann Erickson London launches in February 2009, proclaiming the organisation’s ethical business approach and promoting its co-operative ownership structure. This will include a £10m ethical ad campaign and promotions for the different businesses under the Co-operative banner, such as financial services, funeral services and, of course, food retail.

But just as the Co-op starts shouting about how ethics and fair trade are at the heart of its business, it is likely to be making job cuts as overlapping administrative roles at the two chains are axed. Even so, Co-Operative Group chief executive Peter Marks plays down the prospects of a rocky ride. “We are good at integration,” he says. “We have just come through a very complex integration process when we brought two Co-op societies together less then 12 months ago and delivered ahead of schedule.”

He says there will be “some job losses” but adds: “We are not focusing on making lots of people redundant. Synergies will come from better buying, improved supply chain and IT efficiencies.” And he believes the time is right for the Co-op’s ethical message to stand out. “Corporate greed is becoming seen as not good, people are tired of it. We offer something different – yes we have to make a profit but it is what we do with our profit that makes us different. We have a different DNA from most PLCs, we aren’t just maximising wealth for a few shareholders, our customers are our shareholders.”

He admits that it will be a challenge sourcing food for all the new Somerfield stores from the Co-op’s farms – it is the biggest farm owner by acreage in the UK – but says: “It is a fantastic challenge to have.”

In the long run, the Somerfield acquisition should help revive the Co-op’s fortunes, which have started to turn around following decades of decline. In the first half of this year, Co-op food stores achieved a 4.6% like-for-like sales increase, which is higher than the industry standard. “The sense of having the financial clout to acquire Somerfield means it is a sizeable operator. To have that scale says something about the Co-op’s stature while its positioning is more relevant than ever,” says one source.

The decisive moment in the Co-op’s comeback was last year’s merger between the Co-operative Group and United Co-operatives which catapulted United’s management into key positions in the combined group. United boss Peter Marks was made chief executive, replacing outgoing chief Martin Beaumont. Marks brought with him key lieutenant Tim Hurrell, who becomes food managing director on the retirement of Guy McCracken. When the merger went ahead in the middle of last year, marketing director Zoe Morgan left the business and the combined role was handed to United’s marketer Patrick Allen.

Allen says store refits are attracting new types of shoppers along with older age groups. “It is an exciting time for the Co-operative brand, it has made leaps and bounds in standards, the quality of products and the customer offer. The brand is appealing to a younger profile of consumer not dissimilar to a Marks & Spencer type of customer,” he says. But he plays down perceptions that Co-op stores are more expensive than rivals. “We are not the cheapest, but nor are we among the dearest,” he says.

The relaunch advertising campaign had been planned for 2008, he explains, but will be delayed until the beginning of 2009 when the store refits would have critical mass with 1,500 stores refurbished with the new look. This comprises a new logo and a revamped own-label offer with its premium Truly Irresistible range. Advertising uses the Co-op’s “Good for everyone” slogan, which for the grocery business reads “Good with food”.

Allen says: “We’ll have 70% of the total estate in the new fascia. The ad campaign will look at the difference in the way we make our money from other retailers. People say we are the most ethical brand in the UK. The campaign will look at the way we make money and distribute it through to our members. It is the key difference that sets us apart from the PLCs.”

According to advertising executive Leslie Butterfield, who helped create the Co-op Bank’s original ethical advertising in the early Nineties, the Co-operative Group has rediscovered the power of marketing and realised that it has a powerful property in its ethical positioning. “They rediscovered marketing because of the power of the Co-op Bank in the mid-Nineties. They took ethics in banking into a responsible retailing message. From 1998 that became more a part of their thinking and it has come to fruition in the past five years,” he says.

Some believe the Co-op needs to improve its retail marketing. Mike Godliman, an analyst at Pragma Consulting, says: “Co-op marketing has been very poor in the past, they haven’t been able to put offers together that are interesting for their customers. It could learn from Tesco, which has segmented customers hugely and created attractive price deals on non-food and food.” He says a big issue will be how far the Co-op can extend its non-food offer.

Next year will be pivotal in the Co-op’s history. The success of its attempted renaissance will depend on its ability to convey its ethical message at the same time as it integrates the Somerfield operation. Other grocers on the high street such as Marks & Spencer, Tesco Metro and Sainsbury’s Local had better watch out.

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