The Co-operative Group’s takeover of Somerfield is set to shake up the UK food retail scene and, although some questions remain over the future of the enlarged business, Co-op chief executive Peter Marks believes he has returned his company to big-time retailing. Dean Best spoke with Marks on the morning the deal was finally announced.
“This deal will propel us into the Premiership of food retailing.”
Peter Marks, chief executive of UK retailer The Co-operative, cannot hide his pleasure at securing the acquisition of larger rival Somerfield.
For Marks, the deal signals the return of the Co-op – which, in the 1960s, the UK’s largest food retailer – to the big time and, as just-food snatches a telephone chat with him as he stands in a BBC studio waiting for his next interview, his delight is tangible.
“We are very excited; all round, it’s a cracking deal and is great for our customers, our members and our employees,” Marks says.
The GBP1.6bn (US$3.2bn) takeover, announced on Wednesday (16 July), will make the Co-op the UK’s fifth-largest food retailer, with an estate of over 3,000 stores accounting for about 8% of all grocery sales in the country.
The deal also brings an end to months of tense negotiations between the Co-op and Somerfield. In April, after weeks of speculation had linked the likes of Asda and Waitrose to Somerfield, the Co-op emerged as the only company that had made a formal bid for the entire business, which had been put up for sale at the start of the year.
However, those weeks of talks were just the latest chapter in Marks’s interest in Somerfield. Three years ago, as boss of the then retailer United Co-operatives, the Yorkshireman had considered buying the company, which was eventually taken private by a consortium including property tycoon Robert Tchenguiz, private equity firm Apax Partners, Barclays Capital and Icelandic bank Kaupthing.
This week, after striking a deal with that consortium, Marks, who became Co-op chief executive when United merged with The Co-operative Group last summer, finally got his man. “Our business has changed over the last three years; it’s become stronger and bigger and our stronger, more experienced management meant we were in a position to proceed. The risks were greater back then.”
Some industry watchers believed that the acquisition of Somerfield was the last big chance for a UK retailer to grab a significant chunk of the country’s heavily consolidated grocery sector. The UK’s so-called “big four” grocers – Tesco, Asda, Sainsbury’s and Morrisons – account for the lion’s share of sales and, although competition between them remains fierce, there were precious few opportunities left to get close to breaking into that club.
Marks now sees the UK’s “big four” becoming a “big five” and believes the acquisition of Somerfield has created a powerful position in one of the country’s fastest-growing channels – convenience retailing. “This deal marks us down by a long way as the leading convenience retailer. We will have around 3,000 stores; no other convenience retailer will have that kind of reach,” Marks says.
And he believes the gloomy economic climate in the UK will only serve to benefit his business. “Look at the price of fuel: are people going to get into their cars and drive four miles to their nearest superstore or are they going to walk down to their nearest Co-op store to do their food shopping? Convenience retailing is coming to the fore.”
A number of retail analysts agree that this is a good strategic move for the Co-op. IGD has argued this week that the combined Co-op/Somerfield business can more effectively tap into some of the most buoyant trends in the UK food industry. Convenience is one but ethical consumerism, something in which the Co-op has invested heavily, will also be, IGD believes, a fertile category for the expanded business.
However, other industry watchers have taken a more cautious tone, pointing to possible problems integrating Somerfield into the Co-op’s business and highlighting the difficulties Morrisons faced when it digested Safeway.
Marks is confident that the Co-op’s recent experience with the United merger will stand the company in good stead. “We’re good at integrating businesses,” he insists. “We carried out a very complex, big, integration process with the merger of United Co-operatives and The Co-operative Group and we were ahead of time on that. We have a very experienced team, a skilled team that is used to integration. I’m not saying it’s not a big job – we mustn’t be complacent – but it’s not something that concerns us.”
Question marks also hang over the quality of the Somerfield business, its stores and its image in the eyes of consumers. Marks is quick to dismiss those concerns. “It did go through a rough patch a few years ago but, under chief executive Paul Mason, the team have done a great job restructuring the business, improving the product range and so on and I have a lot of respect for them and I hope to retain a lot of them,” Marks says.
How many of the Somerfield stores the Co-op is allowed to retain is also up for discussion, with the UK’s Office of Fair Trading set to analyse how the takeover will affect competition in parts of the UK. Marks admits the Co-op will have to offload some stores but refuses to be drawn on numbers, saying it is “premature” to speculate on the scale of the disposals.
Of course, store disposals will interest some of the Co-op’s larger rivals and also some smaller competitors, like Aldi, which although accounting for less of the UK grocery market, are growing in popularity in the country as the economic downturn bites. Questions have also been asked about the Co-op’s ability to operate larger stores. Many of the Somerfield outlets are larger than the Co-op’s core estate and analysts, while noting the progress the Co-op has made with its own larger stores in recent months, are still unsure about the company’s ability to run shops of around 10,000 sq ft.
Much, then, for Marks and his management team to ponder in the weeks and months ahead. There is, though, little doubt that Marks believes the company can succeed in, first, integrating Somerfield into the Co-op, and then building a business that can compete with the UK’s “big four”.
“The Co-op is going through a renaissance, it’s an iconic brand and we’re taking it back where it belongs,” Marks says.