UK grocery chains Somerfield and Budgens have both reported improved results for fiscal 2000-01. The UK grocery sector is looking up, and Budgens and Somerfield are seeing some of the benefits. Budgens has surpassed expectations, although a takeover by Ireland's Musgrave still looks likely. Somerfield has improved its results too - but it still has a lot left to prove. Unlike Budgens, the group doesn't seem to have found its own market niche.

UK grocery chain Budgens has found consistent growth opportunities in the convenience store format. Last year was no exception as the group saw annual pre-tax profits rise 17.8% to GBP17.2 million, exceeding analyst expectations.

Budgens has been successful by avoiding direct competition with the big players, focusing instead on developing a network of smaller, local stores with an emphasis on fresh food. Sales in the first eight weeks of this fiscal year were also good, up 6.6% from last year - partly as sunny weather made people reluctant to trek to larger supermarkets.

But Budgens' success has not gone unnoticed and there is now a strong possibility that the store will lose its independence. Last year, Musgrave bought a 28% stake in the group and rumors of a potential takeover are now rife. The Irish food group has aspirations to take a piece of the UK market and will be testing its format in two of the Budgens outlets. A full scale bid may occur next month.

Somerfield, too, has had a good year, although mostly in comparison to its fairly terrible recent history. Sales at the Somerfield branded stores were up 6.2% on last year, while Kwik Save's grew by 3.8%. Nonetheless, the group still lost GBP13.1 million, including a GBP4.6 million exceptional charge from a reorganization program and the closure of its home shopping unit. But this is also better than last year, when Somerfield made a loss of GBP14.5 million.

The merger with Kwik Save threw up a lot of teething troubles for Somerfield but the company's prospects do now look much better than a year ago. It will take a longer period of sales growth before the industry is convinced that Somerfield can maintain its current momentum and reach sustained profitability. Unlike Budgens, it has not yet differentiated itself sufficiently from the major players that it cannot afford to take on.

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