KamLibrary - All Change in UK Retail...

Given Sir Terry Leahy’s shock announcement of his plans to retire in March 2011, coupled with recent changes of CEO at Asda and Morrisons, the question arises whether the CEO of Sainsbury’s might feel inclined to square the circle by moving on, in the event of Qatari completing their takeover of the company…

In which case, it has to be asked what impact this will have on the supplier-retailer relationship at operating level.

Essentially, the Tesco timing was as good as you get, giving the company a year to make the transition to new leadership. Tesco has reached a limit on food expansion in the UK, and any allowable growth will come from non-food goods and services until a point is reached where its share of UK ACV grows from 12.5% to 25%, and once again the company hits a political ceiling. The City will also want Tesco to raise its ROCE to 15% +, in order to ensure that the transition to new leadership does not jeopardise the share price.

Meanwhile, given that the real potential for Tesco is overseas, the new CEO’s global experience means that Tesco is well poised to optimise opportunities outside the UK. On balance, as far as UK food NAMs are concerned, this means that Tesco UK is on hold. Future negotiations will be about cost-cutting, and avoiding any losses arising from the implementation of GSCOP banned conditions, in order to preserve profitability to fund overseas development.

Tesco’s non-food NAMs will have to continue to cope with the usual dilemma of gaining additional market share by riding on the back of the tiger…

Meanwhile Asda, effectively prevented from scaling up its UK operations to Walmart expectations by a combination of competition legislation and limited opportunities to overcome planning barriers, is probably using a combination of the Netto acquisition and possible takeover of Home Retail/Argos as a last-ditch attempt to catch up on Tesco via the non-food route. Failing this, Walmart will probably spin off Asda via either a buyout or sale to an overseas retailer wishing to enter the UK. At street level, this means that the emphasis will be on non-food expansion whilst food categories will probably be used as sources of funding…

Morrisons, given the global experience of the new CEO, needs to balance the maintenance of its current momentum in the UK with the opportunity to explore options overseas. In practice, despite the careful transition process at Tesco, a window has been opened for Morrisons to exploit the inevitable blurring of the market leader’s focus, to grow its share of food and H&B categories at Tesco’s expense. For NAMs this means helping their customer to identify market gaps in Tesco’s marketing mix that optimise Morrisons’ points of difference and potential strengths.

Sainsbury’s, on the other hand, has access to the same ‘Tesco-window’, but needs to exploit it in different ways. Essentially, the company has corrected its supply chain issues and is growing like-for-like sales to match City expectations, but continues to have issues with delivering acceptable levels of Net Margin and ROCE. At operating level, this means attempting to raise shelf prices without impacting like-for-likes, and internal cost-cutting combined with pressure on suppliers to reduce prices or increase terms, or both, if it wishes to remain independent. It hopefully goes without saying that the company is in no position to sacrifice margin via absorption of potential losses arising from GSCOP banned conditions (see video).

This means that Sainsbury’s NAMs need to calculate the sums involved in their supplier-Sainsbury’s relationships for each of the banned conditions and identify possible alternative trading conditions that might be used to recover potential losses. It will be necessary to assess scope for movement and factor these into future negotiations with the company.

Finally, to restore some uncertainty to the above options, given the fact that other famous retailers such as Sam Walton of Walmart, Li Ka-shing of A.S. Watson, Ken Morrison of Morrisons, and Paul-Luis Halley of Carrefour were still going strong in their seventies, perhaps there is a strong possibility that, in the words of another early career-changer, in March 2011 Sir Terry Leahy, as a significant shareholder, could be tempted to conclude his leaving speech with the phrase ‘I’ll be back’…

KamTips: The New UK Multiple Trade Environment, Where Next?…see NamNews June 2010

Date article published: June 2010

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