Challenge of cheap food
The prospect of two titans of British retail, Stuart Rose and Terry Leahy, battling over the future of British grocery as respective chairmen of privateequity owned Asda and Wm Morrison, is intriguing.
What is less clear is whether they will just be figureheads, adding respectability to ownership by financially driven short-term owners, or whether they want to play a real part in restoring value to Britain’s supermarkets.
The most obvious reason why private equity outfits Clayton, Dubilier & Rice (the victors) and Majestic Wine owner Fortress ended up in a bidding war for Morrisons is because the grocers, in common with great swathes of the FTSe 100, have been undervalued by Britain’s big battalion investors.
Institutional holders talk a great game when it comes to environmental, social and governance investing. But when push comes to shove and they are faced with the option of cashing out and boosting the immediate performance of funds, they inevitably take the private shilling.
The fact that under the new ownership no-one cares a jot about climate change, jobs, over-generous partners’ payments coming out of the business or the broader public interest gets no attention in a discussion around price.
Among the practical reasons why Leahy and CDR felt they could pay £7bn for Morrisons (not including debt) was that they spotted a grocery market opportunity.
For much of the last decade, the UK supermarkets, for all the quality of their offerings, have been fighting a running battle with the no-frills German invaders Lidl and Aldi.
The former Sainsbury’s boss Justin King once told me that while price cutting was a nuisance, their phenomenal growth was a temporary distortion. All previous attempts to create a cut-price culture, such as the Kwik Save chain, eventually vaporised.
This was partly the thinking behind the assault on Morrisons. It will possibly apply to J Sainsbury, as activists and private equity run the data over the still quoted high street favourite.
The theory is that as Lidl and Aldi fall out of favour, the threat of discounting will pass and the big four UK supermarket groups will regain their pricing power. All the better for paying off the extra debts (up to £5bn on the Morrisons balance sheet) accumulated as part of the buyout.
WhAT drove this analysis is a belief that the UK is at peak Lidl and the secretive, privately-owned German groups had new targets in their sights. Lidl would be focusing its investment on Australia and the United States rather than the UK.
That may well be wishful thinking. Lidl is showing no signs of going away. Forget Brexit and the hit to inward investment.
The group is planning to ratchet up its presence in the UK by increasing its store footprint from 880 shops to 1,100 by 2025 in a move which will create a further 4,000 jobs. Indeed, together Aldi and Lidl already have broken the pattern set by previous discounters by breaking through the 10pc barrier and grabbing a 14.1pc market share between them. This places them on a par with Mohsin and Zuber Issa’s Asda, which has a 14.3pc share, not far behind Sainsbury’s at 15.2pc.
What the great retail panjandrums Lord Rose and Sir Terry also need to recognise is that their German competitors are also a social phenomenon.
A friend who is an enthusiastic market gardener waxes lyrical on the quality and freshness of Lidl fruit and vegetables.
Another friend, who previously ran several national retail enterprises, buys her sea bass from the same source. For our local annual book club party in Richmond-upon-Thames, I have been urged to buy the wine from Lidl.
Where all of this leaves the private equity plans for Morrisons and Asda is unclear.
One idea, mashing together CDR’s Motor Fuel Group with Morrisons, will depend on what the Competition and Markets Authority finds. The danger in all of this is that the CDR’s strategic plans to develop Morrisons will not hold up.
The alternative will then become a desperate rush to sell off assets and pay down debt before interest rates fully normalise. The consequence of that will be the breakup of Britain’s only integrated food group from farm and fishing fleet, through butcheries and cheese making, to the table.
That would be a homemade disaster.