Somerfield: Somer’s day

During his first few weeks at Somerfield in 2006, chief executive Paul Mason spent some time at the Headingley store in Leeds. When talking to the deli counter operator, Mason was glad to realise that Somerfield staff were not afraid of change.

The Headingley shop had been through several manifestations – prior to being a Somerfield, it was a Morrisons, a Safeway, even a Presto. When Mason asked the employee, who had worked at the store for 25 years, if she had any questions about the business or its new private equity ownership, she replied: “It’s great that you’re here but whatever the name above the door, I will continue to work here because I like it.”
Her view made Mason’s job easier to some extent. Prior to being bought in December 2005 by a private equity consortium comprising Apax, Barclays, entrepreneur Robert Tchenguiz, Kaupthing and the management, Somerfield had been built from a jumble of businesses including Gateway, Fine Fare and Kwik Save.

“Somerfield has never been afraid of changing the name over the door as it has been changed multiple times,” says Mason. “And now it is looking forward to its next movement.”

Mason was brought in by the consortium to lead Somerfield towards its next evolutionary step. In July this year the grocer’s new path was laid out when Somerfield accepted the Co-operative Group’s£1.57 billion offer for the retailer – meaning Somerfield’s name would disappear and the fascia would change once again.

With an Office of Fair Trading investigation into the deal well under way, Mason expects the takeover to conclude by early February and the Co-op looks poised to inherit a business on form.

For the full year to April 26, Somerfield reported EBITDA up 5.4 per cent to£226 million. Present trade is also strong – for the first half of its 2009 financial year, ending November 8, Somerfield EBITDA was ahead 5.4 per cent.

The figures are testament to Mason and his team’s turnaround of the retailer and its ability to trade successfully against a difficult economic backdrop. He is proud of what has been achieved and is eager to see the next phase of Somerfield’s expansion.

However, it has been a tough three years. When Mason took over, he says Somerfield “didn’t know what it was”. He explains: “It grew up from the Gateway days where it was the number two hypermarket operator, then acquired Kwik Save, which was the first discounter in the UK. What we inherited was a disparate group of businesses.”

Mason’s three-year plan was to reshape, regenerate and expand the business. He identified who the Somerfield customer was – largely older, time-rich people who shopped several times a week and did not want to shop in a big store like Asda or Tesco. The customers therefore wanted a local grocer – a community store where they could do a full shop.

To deliver that, Somerfield had to throw out everything else. Mason sold Kwik Save because, he says, “you can’t back two horses in the same race”. He maintains that Somerfield could not service a discounter and supermarket with one team. “Somerfield was directly in competition with Kwik Save, as it is now with everyone from Iceland to Lidl, and yet we were trying to do joint buying, for example,” he says.

Alongside the sale of Kwik Save, Mason identified underperforming Somerfield stores – 550 in total – and sold those too. The Bristol head office was streamlined from 1,800 to 800 staff, 50 per cent of its distribution capability was sold and IT was offshored.

Mason says while all that could have been achieved at a public company, the City would not have accepted it. “What you’re saying really is give me a one-year holiday on like-for-likes,” he explains. He says the focus was on the customer and being private equity-backed meant he did not need to be paranoid about the top line for that first year.

Somerfield group finance director David Cheyne also points out the shareholders would have baulked at the sale of Kwik Save. “They would not have been able to conceive of us selling something that was a third of the business and do it profitably – generate about£400 million – and still maintain the share price,” he says. “Under private equity, we were given the freedom to go and make it happen. And as our most recent numbers show, that decision has paid off.”

Premier picks

Key to the turnaround for Mason was to build a team “based around Asda, Tesco and Sainsbury’s executives”. Cheyne became the sole survivor of the old Somerfield top team and Mason hired grocery veterans John Cleland, Oliver Meakin and Colin Smith, who all had strong experience at competitors.

“Because the attraction as manager means you can have an equity stake, we were able to attract premier league players,” says Mason. “Cleland, for example, is only 42 and will go on to run major retail businesses. We got a management team going up, rather than one the other way around.”

Mason is not afraid to admit he took ideas from competitors, having previously run Asda himself. “We’ve taken the best bits of Tesco and Asda and personalised them for Somerfield,” he says.

Somerfield’s availability system is one example. After stripping out 25 per cent of SKUs, lowering shelf heights and relaunching its own-label ranges, Somerfield needed to invest in re-skilling the business. Mason inherited a programme to install a£120 million SAP system, which he cancelled, and spent a fraction of that amount changing processes, then the systems.

“At Wal-Mart we learnt not to use systems as a surrogate to change processes,” he says. As a result, Somerfield implemented an availability system called Gap II, which Mason says is “a direct rip-off of Wal-Mart’s availability system”. It scans gaps on shelves and helps staff identify the problem. A typical store previously had about 400 gaps, now down to 50.

The Gap II system illustrates how the lessons Somerfield has learnt will live on after the Co-op deal is concluded. Cheyne says that Co-op boss Peter Marks is keen to expand Gap II to his existing portfolio and that the system “will live on longer than the Somerfield branding”.
The Somerfield estate was also refurbished to create a uniform portfolio. The Essentials and Market Fresh fascias were ditched and Somerfield now simply has small, medium and large supermarkets, and its forecourts.

“The stores used to look garish, there was overhead signage nobody could read, shoppers were struggling to reach whatever was on the highest shelf and there was a hotchpotch of shelving patterns,” says Mason.

Simple, black directional signage with red and white merchandised promotions is now uniform throughout Somerfield and the forecourts. The retailer also concentrates its promotional marketing on 7 million leaflets distributed around stores and mailed locally each week as the backbone of its community feel.

End of an Era

While he admits a little sadness that the Somerfield name will disappear from the high street, Mason believes the grocer has a bright future under the Co-op and Marks. He says: “Peter has more experience of integrating businesses than anyone else and, aside from creating the fifth biggest grocery player, he will be the outright number one in convenience.”

Mason notes the difficult economic climate has meant all grocers have seen a slight slowing in organic and ethical ranges, but says the Co-op is the most ethical retailer “by a mile” and Marks is in it for the long term. “There has been a seismic shift in behaviour and attitude in sustainability and the growth in this agenda is in Marks’ favour,” he says. “Plus we have an ageing population – with twice as many retired people as those working by 2050 – and they are Somerfield customers.”

Mason remains committed to Somerfield and will “see the job through”. He is keen for new projects – such as his chairmanship of handbag brand Radley – but says his primary focus remains Somerfield. “Peter and I get on very well and I’ve invested too much in the business not to want to help it on to its next stage as smoothly as possible,” he says.

What Mason will hand over to Marks next year will, he says, be testament to what private equity can achieve. “We have invested more in the business than the previous management and we ran it like a conventional business,” he maintains.

“We’ve achieved excellent growth without typical asset stripping. And that growth has been maintained even after the Co-op deal was announced because we have been open with staff.”

So, Mason has prepared the business for change once again. But as the Headingley store’s deli counter operator understands, it’s what’s inside that counts.

Wholesale changes

1875: a small family grocery store was opened by J H Mills in Bristol
1900-88: the grocer expands, changing its name to Gateway, and goes through several other guises
1990: the first Somerfield store opens from the remnants of Gateway, acquired by holding company Isosceles
1996: Somerfield becomes independent and is floated on the Stock Exchange
1998: Somerfield and Kwik Save merge
2005: Somerfield is taken private by a consortium consisting of Barclays, Apax, Robert Tchenguiz, Kaupthing and management. John Lovering is appointed chairman
2006: Paul Mason is hired as chief executive, who then appoints a new top management team; Kwik Save is sold to Back to the Future, a group of private equity investors including Peacocks chief executive Richard Kirk
July 2008: Somerfield accepts an offer from the Co-op to buy the business
October 2008: The Office of Fair Trading gives the deal ‘first decision’ clearance, with completion expected February next year