Somerfield's Price Check slices profit: Discounting boosts food retailer's sales of like-for-like lines by 13%

PRICE CHECK, the price-cutting campaign launched by Somerfield last year, has boosted its like-for- like sales 13 per cent - but at the cost of almost a third of its operating profit.

The food retailer, which changed its name from Gateway at the start of the year, made pounds 51.8m operating profit in the 43 weeks to April, equivalent to about pounds 66m for a full year. That was almost pounds 40m below the pounds 103.6m earned in the previous year, despite a rise in sales from pounds 2.9m to a pro forma pounds 3.1bn.

David Simons, chief executive, had warned that profits were likely to suffer as the group strove to reverse the decline in sales it has been suffering for at least five years. 'The first year of our three- year restructuring plan was satisfactory in so far as turnover decline has been reversed and Somerfield has been re-established as a serious contender in an industry which has experienced unprecedented competitive pressure.'

He estimates its prices in the past year have fallen by up to 3 per cent, largely due to Price Check - which commits the stores to matching the prices charged by competitors and has heavy discounts on about 30 items a week. That has boosted its market share from 8.6 to 9.2 per cent, but gross margins have dropped by about 3 percentage points. Its stores are mainly in the high street and Mr Simons believes it has managed to tempt back some shoppers from out-of-town centres.

Sales were also helped by the conversion of some of its Gateway stores to the Somerfield brand and an increase in the floor space given to fresh produce. A total of 46 stores were refurbished during the year, bringing the total to 107, and 40 more have been converted since. Mr Simons said conversion added 10 per cent to sales in the average store.

Sales in the current year are 5 per cent ahead. Somerfield expects cost savings and efficiencies from introducing electronic scanning at its tills, and profits this year are expected to be ahead of last.

Somerfield is owned by Isosceles, which did a leveraged buyout of the group in 1989. Last year the banks agreed a financial restructuring under which Somerfield was freed of the burden of all but pounds 500m of Isosceles' pounds 1.4bn debt. Mr Simons said yesterday that a flotation was possible, once Somerfield had established a trading record, which would give the banks some return on their investment.

Its pre-tax profits for the period were pounds 25.4m, equal to a pro forma pounds 33.5m, compared with a pounds 257.5m loss last time. That was after pounds 169.2m interest charges and pounds 191.9m of exceptional costs, while the 1994 results included just pounds 32.8m of interest charges.

The group's debt at the period end was pounds 463.7m, and the average was pounds 438m, from a facility of pounds 550m. Capital spending this year is expected to rise to pounds 100m from pounds 76m, which means borrowings are likely to rise slightly.