Both Asda and the Co-op have gained from the sale of the latter’s petrol forecourts to the big-four grocer, but one looks more likely to benefit in the long term than the other, writes Hugh Radojev
After Asda swooped to acquire 132 Co-op petrol station forecourts earlier this week, the grocery giant’s owners have given the clearest sign yet of where they see opportunities for the UK’s third-largest supermarket chain.
The deal, worth £438m in cash upfront and a further £162m in lease liabilities, is due to complete later in the year and represents a win-win for both Asda and the Co-op.
The Co-op’s shorter-term budgetary issues have been well documented and the sale will give it a significant injection of cash at a trying time.
The acquisition is also a coup for Asda and gives the clearest indication yet that owners the Issa brothers and TDR see convenience as a strong growth channel in the long term.
While the Co-op has chosen to spin the sale as a disposal of petrol forecourts, Asda has hailed it as an acquisition of a ready-made portfolio of c-stores.
The Issa brothers and TDR made a late tilt at acquiring failing convenience store chain McColl’s earlier this year for EG Group. They have also been ramping up the rollout of the Asda On the Move format – which Asda wholesales product to – across its EG Group forecourts. The grocer has also indicated the acquired Co-op forecourts will be turned into a new Asda convenience format.
Despite the cost-of-living crisis and high inflationary food environment, Asda insiders insist current forecourt convenience store sales are performing strongly.
“The new On the Move sites have been some of the best performing new openings that EG Group have had,” says one Asda insider. “That signifies that our products do really well in a convenience setting, so we’re going to take the learnings from the On the Move sites.”
When added to Asda’s 323 existing forecourt sites, and the On the Move stores, the grocery giant will finally be going someway to punching its weight in a lucrative part of the market it has been severely underrepresented in for years – by comparison, Sainsbury’s has more than 800 convenience stores.
There are also synergies in the new formats for Asda with the stable of brands EG Group is building such as Leon, which EG Group owns, and KFC, Greggs and Krispy Kreme, which EG has UK franchise rights with.
“If they embrace the learnings [from On the Move] with a solid core grocery offer combined with some of those third-party brands, I can see no reason why these newly acquired stores won’t stand them in really good stead,” says IGD global retail lead Bryan Roberts.
Debt down
The situation at the Co-op is more delicate. The retailer is due to update members and the wider market on its interim results in the coming weeks, and insiders have not given much away in terms of what its current net debt position is. It stood at £920m in its most recent annual report, published in April.
With the deal now all but confirmed, Co-op sources have emphasised that the lion’s share of the windfall will be used to pay down debts and strengthen the Co-op’s balance sheet. One said the £600m figure represents a sale “eight-times over current earnings” for the 132 forecourts.
The Co-op has also earmarked at least some of the proceeds to reinvest into its convenience business and into growing its wholesale, franchise and ecommerce operations.
The devil will be in the detail. The Co-op has yet to indicate how much of the £600m will go to pay down debt and what will then be left to reinvest. However, as Shore Capital analyst Clive Black points out, the Co-op can cut and run from forecourts, a location it “was not committed to”, while deleveraging its balance sheet.
Still, were the Co-op not facing growing debt, it is hard to see how it would have been so eager to sell off a portfolio of stores that generated £863m of sales and £53m of profits in the year to June.
“Both Asda and the Co-op have done well out of this deal but Asda looks like the one getting into a higher gear”
The danger for the Co-op and new group chief executive Shirine Khoury-Haq is that it has traded a short-term windfall for potentially billions in lost sales in future.
It has also strengthened a rival in its core convenience market that will have greater financial firepower to compete on price and availability – two areas where the Co-op is struggling.
All eyes now turn to the Competition and Markets Authority, which has been busy with petrol forecourt retailing this year, most recently casting an eye over Morrisons’ acquisition of McColl’s.
Both Asda and the Co-op have done well out of this deal. However, with a new opportunity in convenience and the solid performance of its core grocery business, combined with the backing of entrepreneurial owners with deep pockets, Asda looks like the one getting into a higher gear.
- Get the latest grocery news and insight straight to your inbox – sign up for our weekly newsletter
No comments yet