Competition Commission inquiry will dominate 2008

Next year promises to be a pivotal one for the sector for many reasons, not least because the Competition Commission will publish the final report into its bitterly contested inquiry before May 8.

Ahead of Auld Lang Syne, Retail Week takes a glimpse at the key issues facing the big four and what might result from the inquiry:

1. Competition Commission inquiry into the grocer sector. Before the final report in May, the Commission chairman Peter Freeman is likely to deliver an update on its thinking about potential remedies.

Much chest-thumping from the big four, the independents and suppliers will no doubt focus on any suggestions concerning possible store divestments, local competition or planning reform.

But the safe money is on a tightening up of the controversial Supermarkets Code of Practice to make it easier for grievances between suppliers and the big four to be resolved.

2. Tesco’s US expansion. After an impressive launch, Tesco will have 200 Fresh & Easy convenience stores by the end of February. By the end of next year, the grocery giant will have a much better idea about the depth of US consumers’ love or indifference to the offer.

Despite City analysts lavishing praise on US boss Tim Mason and his team, Tesco succeeding in the US market is no slam-dunk. As it gains in scale, Tesco may have to tweak its product offer to suit customers in different localities and its competitors are bound to fight back as the world’s third largest retailer lands in their backyard.

3. Business-as-usual for Sainsbury’s? After the spectacular collapse of Delta Two’s proposed£10.6 billion acquisition of the grocer in November, Sainsbury’s should have a period free of corporate activity – at least for the first half of the year. This is largely because the Qatari-backed investment vehicle is prevented from making another bid for six months unless another company launches a separate offer.

Furthermore, Delta Two is unlikely to throw its bid hat into the ring again until the second half of the year, because it has to match the 595p-a-share price it paid in June – a massive premium on Sainsbury’s current share price of about 430p– until after mid-June 2008.
And the fact that Delta Two holds more than a 29 per cent stake makes it unlikely that another private equity firm will enter the water, even if funds could be raised.

Despite missing out on an early and lucrative payout, Sainsbury’s chief executive Justin King will probably welcome a year of solely running the business. However, after delivering 11 consecutive periods of like-for-like growth, he faces an uphill task. City analysts also remain sceptical that Sainsbury’s can break through its potential operating margin ceiling of 4 per cent in the medium term.

4. Morrisons post-Sir Ken. Before its AGM in June 2008, Sir Ken Morrison will have bid farewell and chief executive Marc Bolland will be freer to shape the Bradford-based grocer’s strategy.

As long as Morrisons continues its advertising, store refurbishment programme and product development with its present gusto, the grocer should be confident of maintaining its sales and profit momentum. But it is in the second half of 2008 that Bolland could reveal his hand on e-commerce and a more aggressive non-food strategy, marking a clear break from the Sir Ken era.

5. Asda’s non-food and e-commerce offensive. The Leeds-based grocer is likely to unleash an expansion of Asda Direct – its trial of a combined web site, catalogue and in-store collection desks – to more stores, as it aligns its guns on Argos, Tesco and other general merchandise value retailers.

It will relaunch its web site onto an integrated grocery and general merchandise platform, which will be good news for web-savvy customers. In its bread-and-butter grocery business, it faces a battle to maintain its existing momentum as a result of a resurgent Morrisons and the continuing strong performance of old foe Tesco.

But if a price war remains high on the grocery agenda, Asda should benefit from the deep pockets of parent Wal-Mart.

Of course, these are just some of the issues that will shape 2008. During the year, Sainsbury’s, Asda, Morrisons or even the Co-operative Group may even launch a bid for Somerfield, but this is unlikely to happen without a strong improvement in the credit markets.

Whatever happens, 2008 promises to deliver plenty of surprises, although after the spectacular collapse of Kwik Save, two aborted bids for Sainsbury’s and Tesco’s launch in the US, 2007 will be a tough act to follow. Over to you Mr Freeman.

Retail Week would like to wish all our readers a great Christmas and a prosperous new year.