Tuesday July 13, 11:16 am Eastern Time
ANALYSIS-UK shops prepare for battle with Wal-Mart
By Jane Merriman
LONDON, July 13 (Reuters) - Britain's food retailers, bracing for the arrival of U.S. retail giant Wal-Mart (NYSE:WMT - news) this month, are facing an increasingly bruising battle for sales, illustrated by Safeway Plc's (quote from Yahoo! UK & Ireland: SFW.L) move this week to cut prices, the latest in a string of promotions.
Safeway, the smallest of the UK's big four supermarkets, reported a slight improvement in first quarter sales on Tuesday, but said life in general was getting harder.
Chief Executive Colin Smith said the UK food retailing sector was looking much tougher, with stores facing low sales volume growth and low food price inflation as well as increasing pressure on prices.
''It's bad for everyone out there,'' he told journalists.
Safeway managed to boost sales growth in recent weeks in line with the industry average -- roughly about one percent -- and said it would create 3,500 new jobs this year largely from new store openings.
But the retailer is also cutting costs, including axing an unspecified number of management jobs, because of intense competition, which industry experts say can only get worse once Wal-Mart completes its 6.7 billion pound ($10.4 billion) takeover of ASDA Group Plc (quote from Yahoo! UK & Ireland: ASSD.L).
Despite the improvement in sales, Safeway profit forecasts for the current year were cut by about 10 percent to around 310 to 320 million pounds, food retail analysts said, reflecting doubts about firm's ability to drive profitable sales growth over the longer term. They also noted Safeway has put its share buyback on hold, after purchasing about 160 million pounds worth of its own shares since May.
Wal-Mart, likely to complete its ASDA deal in a couple of weeks, is expected to raise the stakes in the UK's superstore wars if it starts its own pricing offensive.
Food retailers' shares have been hit by the competitive climate, with the sector as a whole underperforming the wider UK market by 12 percent since the start of the year and by nearly five percent since Wal-Mart's bid in June.
The sector was already under a cloud after the UK Competition Commission launched an investigation into whether supermarkets were making excess profits. But analysts say Wal-Mart's move has made this probe seem almost irrelevant.
Nervousness ahead of the American retail giant's arrival was evident in skirmishing in the UK press between the supermarkets over the past few days.
ASDA, the number three supermarket, raised hackles at number two player J Sainsbury Plc (quote from Yahoo! UK & Ireland: SBRY.L) by highlighting a survey which showed ASDA now had the second largest share of grocery goods for the first time last month.
Sainsbury hit back saying this referred only to a limited category of non-perishable merchandise. And analysts dismissed the survey, saying Sainsbury's overall sales this year were likely to be three billion pounds ahead of ASDA's.
Tesco was also rattled when another survey last week of UK store managers named the UK market leader as the chain likely to suffer most from Wal-Mart.
Wal-Mart sent shock waves through the UK retail industry in June with its sudden swoop on ASDA. The retailer, with huge buying power and cashflow, has a reputation for cutting prices to the bone.
''A lot depends on what they do when they own ASDA,'' said one analyst, ''If they come in and cut prices then operating profit in the sector will be decimated.''
But if they are less aggressive, which some analysts believe is more likely, then the existing pecking order could remain, although with a step up in competition.
One view is that Wal-Mart might be more aggressive on non-food merchandise, such as toiletries and one-off special offers on homewares or clothing.
''I'm not sure that Wal-Mart is as big a threat to the food side of the business as to non-food,'' said David Stoddart, food retail analyst at Investec Henderson Crosthwaite.
Analysts disagreed with the store managers' survey that Tesco had most to fear from Wal-Mart.
''I think Tesco is the least threatened,'' said one, who said Tesco had the deepest pockets and the best management to do battle with its competitors.
''The most vulnerable retailers competing against Wal Mart are those that do not have any sort of promotions budget, do not have good management and basically rely on selling commodity products cheaply.''
($1=.6425 Pound)
($1 equals .6425 Pound)
|
