Store raiders line the aisles

Stand by for the acquisitions version of 'Supermarket Sweep'

An almighty game of Supermarket Sweep is about to be played out among Britain's food retailers. And in the role of Dale Winton will be Stephen Byers, the Trade and Industry Secretary.

An almighty game of Supermarket Sweep is about to be played out among Britain's food retailers. And in the role of Dale Winton will be Stephen Byers, the Trade and Industry Secretary.

The contestants lining up are the bosses of Britain's best-known supermarket groups: Terry Leahy of Tesco, Carlos Criado-Perez of Safeway, Sir Peter Davis of J Sainsbury and David Ferguson of Asda Wal-Mart. The game has a European flavour, too, with Cornelis van der Hoeven of the Netherlands' Ahold and Daniel Bernard France's Carrefour about to join in.

The prize for the winner is control of Britain's £85bn-a-year supermarket sector; while the losers will instantly get ejected from the contest.

Mr Byers in effect signalled the start of the game on Tuesday with his recommendations on the two-year inquiry into supermarket pricing, which took in both the Office of Fair Trading and, latterly, the Competition Commission.

With a background of falling grocery prices, he concluded that there was no need for excessive regulation. In short, his message to retailers was: "behave yourselves".

With the report out of the way and with little threat of excessive regulation, the supermarket groups are now excepted to launch a wave of mergers and acquisitions.

"The supermarkets just didn't dare doing anything with the report hanging over their heads. The floodgates have now been opened," says Mike Godliman, a director at retail research group Verdict.

As the Competition Commission revealed in its whopping three-volume, 1,200-page report, things have actually got quite tough for some of Britain's retailers. This is mainly down to the margins on food items being squashed to wafer-thin levels as a result of aggressive price cutting. It is estimated that the big four supermarket groups have made more than £1bn of cuts since the regulatory spotlight shone on them two years ago. At the same time, the opportunity to increase volumes by building more stores has been hampered by tight planning rules on out-of-town development.

Among the big four, a two-tier structure has developed. Tesco, the world's 16th-largest retailer, and Asda, owned by the world's largest retailer, Wal-Mart, have come out on top. Their price-cutting has been the most aggressive. But this has been offset by their move into selling non-food items at higher margins. Safeway and Sains- bury's, both under new and highly regarded management, are struggling to compete on the new lower margins as their non-food offerings are relatively limited. Mr Godliman warns: "When a supermarket shows a sign of weakness it will be pounced on."

For the time being, however, Sainsbury's and Safeway look like they have won a stay of execution as the City has given their new management time to bed down. Safeway's shares are up 29 per cent on the year and Sainsbury's shares are up 2.6 per cent. Sainsbury's has the advantage of being 52 per cent family-owned, despite the fact that there is no longer a member of the family on the board.

But the groups will need to keep a keen eye on more than just their UK competition. Both Ahold, which is the world's 10th-largest retailer, and Carrefour, the second largest, have ambitious plans to expand, and the UK is understood to be firmly in their sights.

Ahold, which has 7,000 stores in 25 countries, is thought to have the biggest appetite for British food. David Shriver, retail analyst at Credit Suisse First Boston, says: "Ahold is looking to cement its position as one of the world's leading food retailers. It is keen on cross-border deals. Coming to the UK is possible." He says Ahold's management would raise capital for a bid through a rights issue: its shares have risen 20 per cent this year.

Safeway, whose largest shareholder is Franklin Resources with a 13 per cent holding, is tipped by analysts as a target because it doesn't have the complication of a family holding. But its healthy share price reflects the City's faith in its new chief executive, Carlos Criado-Perez. Philip Dorgan, retail analyst at West LB Panmure, says: "Safeway now has a plan A instead of a plan B. Any bidder would have to pay a premium for the group."

WM Morrison, which has most of its 100 stores in the north of England, is also tipped as a potential target for a foreign group. Almost 40 per cent of the company is owned by executive chairman Sir Ken Morrison and private shareholders related to the family. But one corporate financier, who asked not to be named, says: "Ken would sell if he was offered the right price."

So, what about domestic consolidation? Tesco and Asda Wal-Mart are the dominant players. They control nearly 30 per cent of the food retail market, while Sainsbury's and Safeway account for 20 per cent. Critically, however, Tesco and Asda Wal-Mart have got the more aggressive price-cutting strategies, coupled with a higher margin of non-food offerings.

Despite the Competition Commission's report being widely regarded as a damp squib, it warns supermarkets against becoming dominant in local areas. A largely overlooked paragraph in the report says that Tesco "is only just short of having a scale monopoly" in the UK. And it says that "further concentration could weaken competition". As a result, the big four are initially expected to concentrate on building stores organically or acquiring smaller retailers.

Wal-Mart is understood to have run the slide-rule over Boots, and last week it emerged that Sainsbury's had also trotted in to see - but subsequently abandoned talks with - the chemist.

Sources close to Sainsbury's say that Sir Peter has got a shortlist of another three companies he is interested in talking to. However, one company which the big four are unlikely to go for is Somerfield. Executives at the supermarket group would positively welcome a bit of predatory attention. But Somerfield has become the bogeyman of the retail sector following its disastrous acquisition of Kwik Save in 1998, which has wiped 74 per cent off its share price. This summer it couldn't even find anyone to buy 45 of its stores. The chances of its long-suffering shareholders receiving some swift pain relief from a bidder looks increasingly slim. Their only hope now rests with the new chief executive, Alan Smith, mustering some magic. In the giant game of Supermarket Sweep, Somerfield doesn't even make the screen test.