Outlook: Safeway

LITTLE BY LITTLE, life is getting tougher for the major supermarkets. Already the subject of an OFT investigation into high profit margins, they are now finding that food retailing is not as protected against the squeeze in consumer spending as they thought. Christmas will be the toughest for years, Safeway said yesterday, and it is already seeing the hint of a price battle in commodity items like bread, milk and baked beans. As Northern Foods, the M&S food supplier, said earlier this week, shoppers have stopped trading up. It is all enough to send a chief executive quite off his trolley.

This has been reflected in the share prices of all the major supermarket groups. The sector as a whole has missed out on the stock market rally. But Safeway remains the laggard of the pack.

Yesterday's figures showed above-average sales growth and the company has addressed some of its most glaring deficiencies, such as poor product availability. But much of its recent sales bounce has been due to lower margins, punchy promotions, and trading against pathetically weak sales comparisons this time last year. So where does Safeway head from here?

The OFT investigation virtually rules out an Asda-Safeway tie-up, at least in the medium term. That leaves Safeway to battle on alone against rivals with far greater buying power and economies of scale. Tesco wants to get even bigger by taking on global ambitions. Across the Channel, European rivals such as Carrefour, Ahold and Promodes are expanding beyond their national boundaries. And the mighty Wal-Mart is crossing the Atlantic.

As cross-border consolidation becomes more common, perhaps one of these giants will put a friendly arm around Safeway. On the other hand, will these hypermarket operators really be interested in the number four in the market? It is not hard to see why the stock market remains so downbeat about Safeway.