Supermarkets on the shopping list

The euro has sparked a wave of mergers, write Melanie Bien and Hilary Clarke

Shopping for Danone yoghurts in France or real Virgin olive oil in Italian supermarkets used to be one of the treats of holidaying on the Continent. But the EU's single market increasingly means shoppers no longer have to go abroad to pick up Continental brands, many of which have become household names in this country.

On the Continent itself, the single market and the launch of the euro have triggered a wave of cross-border consolidation.

"It's deeper and faster than anything we have seen to date," says David Shriver, analyst at Credit Suisse First Boston.

But while there has been plenty of merger activity in the US and on the Continent, consolidation in the food retailing sector in the UK has so far been restricted to second-tier players such as Somerfield and Kwik Save. The "big four" - J Sainsbury, Tesco, Safeway and Asda - have existed side-by-side, carving their own niches.

But not for much longer. Kingfisher is negotiating a share-swap with Asda, which would make the combined group the second-largest in the UK after Tesco in terms of retail sales. The new group would have annual sales of pounds 18bn, which the management says would bring better terms from suppliers, saving pounds 10m in distribution and administration costs. However, it is by no means a done deal.

Wal-Mart, the American giant which is thought to have been looking at the UK market, reinforced these rumours earlier this month when the Prime Minister, Tony Blair, had a meeting with Wal-Mart executives. A rival bid for Asda is not out of the question, especially as Kingfisher's bid was a low 180.1p per share.

Wal-Mart is no stranger to rationalisation, providing the catalyst for the consolidation of Europe's retail industry. Since the American giant first entered the European market in December 1997 with the acquisition of Wertkauf - the 21-strong hypermarket chain in southern Germany - it has also snapped up 74 stores from Spar Handels. Wal-Mart's growth rate - opening the same trading space per year as Tesco, Safeway and J Sainsbury put together - is likely to strike fear into the hearts of European rivals.

But not everyone is convinced that Wal-Mart will swoop on Asda. Matthew McEachran, retail analyst at Investec Henderson Crosthwaite, says: "The odds are heavily against it. Wal-Mart doesn't need to buy up a chain. Asda is small-fry as far as they are concerned."

The UK retail market is fairly mature but analysts believe that consolidation will be beneficial. "The announcement of Asda and Kingfisher's proposals to merge has given a boost to the whole sector in terms of corporate activity and you would expect all the majors to be boosted by merger activity," says Clive Black, an analyst at Charterhouse Securities.

Germany is also witnessing further consolidation among retailers, with Cora and Casino merging to form Opera. German food retailers Aldi and Lidl are focusing on the UK market, meeting with limited success.

Dutch retailer Ahold, which has operations in 17 countries, is also looking to move into the British market.

But analysts believe Ahold has not set its sights on Asda, as it would not be a natural partner for the Dutch company. Ahold tends to be more interested in smaller stores so would be more likely to go with Safeway or J Sainsbury.

If Tesco were to entertain thoughts of a merger, it might see Ahold as providing a foothold into the US market, where the Dutch giant has focused in recent years.

With consumer spending in the UK floundering, Tesco is fighting to maintain growth. It may have sold its French subsidiary in December 1997, but it remains big in Ireland and eastern Europe, particularly Hungary and Poland, and is keen to expand further.

"Food retail is a competitive sector," says McEachran. "There is lots of consolidation going on, and the Asda-Kingfisher deal won't be the last."