Kwik Save losing the bean war The Investment Column

These are worrying times for Kwik Save, and management's decision to bring in Andersen Consulting to conduct a root-and-branch strategic review only adds to the concerns. Graeme Bowler and his team have tried just about everything in the last few years and nothing has worked. Turning outside for help seems to indicate that they have run out of ideas.

Kwik Save's central problem is an old one now. Its once-secure niche as "Britain's number one discounter" is looking increasingly vulnerable. The superstores are encroaching on Kwik Save's territory by offering equally cheap ranges on commodity products. When Kwik Save cut the price of baked beans to 3p, Tesco matched it. And while the superstores park their tanks on Graeme Bowler's lawn, the threat from Continental discounters grows.

Kwik Save says that the only thing that is not up for grabs in the review is its position as a discounter. The question is how to deliver it. A loyalty card looks unlikely as the company does not have the systems. An extension of the range would increase already-mushrooming costs. It looks an unenviable position, which is why analysts were cutting forecasts yesterday and predicting further falls in the share price, even after yesterday's 9 per cent slump from 468p to 428p.

Yesterday's disappointing results showed the same old problems, with a few new ones thrown in. Pre-tax profits were down 28 per cent to pounds 44.2m. Though sales were up 8 per cent (or 1 per cent like-for-like) costs rocketed by 19 per cent.

Part of that rise was due to the company investing in a new distribution centre, re-writing its computer systems and staff training. And though buying terms have improved, pricing pressure on basic items such as beans, tomatoes and corned beef has hit the gross margin. The margin in the first half fell by 0.2 per cent compared with last year. There was also a warning that the margin would fall further in the second half due to continuing tough trading conditions.

Though like-for-like sales are up by 1 per cent since the year end, customer numbers continue to fall after the 3 per cent fall in the first half. The problems have forced the company to rein back its ambitious store opening programme. It will now open only 35 new stores this year, half the planned figure, reducing capital expenditure from pounds 145m to pounds 120m.

The Shoprite stores in Scotland and the North-east that were acquired last year are improving but still made a half-year loss of pounds 3m. Kwik Save shares have fallen from more than 700p last summer to yesterday's 428p. But even with analysts cutting full-year forecasts to pounds 87m, giving a price/earnings multiple of 12, they still enjoy a premium to Tesco and Argyll which is hard to justify. The shares look set to fall further. Sell.