Somerfield back on the discount shelf

SOMERFIELD, Britain's fifth-largest supermarket chain, has perhaps received more negative publicity in the last few years than any other retailer apart from Sears.

Derided as a downmarket shopping experience that has never shaken off its past as the former Gateway supermarkets, it suffered the indignity of having its issue price cut twice before institutional investors would countenance buying the shares when the company floated on the stock market three years ago.

It must have been with smug satisfaction, then, that Somerfield's beleaguered chief executive, David Simons, saw his share price vaulting upwards last year on the back of the company's merger with Kwik Save.

Analysts quickly warmed to the potential cost-savings of the deal. For David Simons, an ambitious man, the ultimate prize of a place in the FTSE 100 finally seemed within his grasp.

Now all that momentum has been lost. A shock profits warning last month has pulled the rug from under the shares which had already been sliding in the face of a tougher trading environment made worse by the Competition Commission inquiry into supermarket prices.

Since their peak last year, the shares have fallen from 481p to just 203p. The collapse is all the more galling as the first of the management's share options can be cashed in next month. Once worth enough to make Mr Simons and his team rich men, they are now barely above water.

Searching for excuses, the company recently sacked its second set of public relations advisers since its 1996 float. Citigate Dewe Rogerson was dispensed with on the grounds that "it was time for a change".

Martin Gatto, the group's finance director, was in London on Friday interviewing potential replacements with Finsbury, Holborn and Ludgate all pitching for the account. Critics say it is typical of the company to "shoot the messenge".

Somerfield has always had its detractors and late last week it seemed they were working overtime again. The claim was that sales in some of the Kwik Save stores which have been converted to the Somerfield format as a result of last year's merger, had fallen by as much as 50 per cent.

The explanation was that in some locations, such as Liverpool, consumers had not been prepared to pay the higher prices charged in the stores when rebranded under the more mid-market Somerfield banner, and have taken their custom to other discounters.

But Mr Gatto says the figures are untrue. Sales in the Liverpool stores are down by no more than 10 per cent. "It seems that some people are out to get us again," Mr Gatto said.

One possible reason was Somerfield's shock profits warning earlier this month, which came just weeks after the company gave briefings to City analysts. The warning said like-for-like sales in some stores such as Durham and Cardiff had fallen by 13 to 28 per cent.

Mr Gatto admits that if these trends continue, some of the stores could fall into loss.

But the company is confident it has not taken on too much with the Kwik Save stores. Its new approach is to convert a further 450 Kwik Saves to the Somerfield format, but still leave the remaining 300 branches under the old Kwik Save name. It is also working with the Government's social exclusion unit to get more supermarkets into deprived areas.

But analysts are sceptical. Paul Smiddy of Credit Lyonnais Laing says: "A lot of chickens have come home to roost here. In the early stages they benefited from squeezing suppliers. But the conversion programme stage is more difficult."

Mike Dennis at SG Securities believes the admission that Somerfield will have to operate with two brands, not one, will lead to inefficiencies and lower the scope for cost-cutting.

Analysts say that US value investors who piled into the stock in 1997 and 1998 and at one stage accounted for almost 40 per cent of the equity, may not be so gung-ho again.