Morrisons takeover is proving to be a disaster

Debt-laden supermarket has lost its number four ranking among grocers to Aldi just as inflation hits shoppers and financiers

The debt-financed private equity takeover of Morrisons is fast shaping up to be a deal for the ages. With Morrisons already struggling to hold its position as the number four player, record inflation hurtling down the track, and a prolonged era of ultra-low borrowing costs about to come juddering to a halt, the decision of American financiers Clayton Dubilier and Rice to push ahead with a £10bn take-private bid looked highly questionable.

But after a once-in-a-generation shake-up of the supermarket rankings saw Morrisons ejected from the “big four” club, executives at CD&R may be wishing they’d swallowed their pride and walked away.

For two decades, Britain’s supermarket industry has been dominated by the same quartet: Tesco; Sainsbury’s; Asda; and Bradford-based Morrisons. However, in a stunning changing of the guard that will rock the sector, Aldi has toppled Morrisons to take fourth spot, according to the last figures from data provider Kantar.

Occurring in the weeks immediately after the competition watchdog gave its blessing for Morrisons to change hands, it is hard to imagine a worse possible start for CD&R’S ownership. Serious questions were already being asked about its ability to refinance the debt mountain it used to fund the £10bn buyout without sweeping cost cuts, hiking prices at the tills, or breaking the company up and selling off assets.

The shift says much about the march of the German discounters, which has occurred at something close to warp speed. Having started in the UK with a single Birmingham store in 1990, Aldi now has close to 1,000 and is targeting a total of 1,200 by the end of 2025. Lidl is hot on its rival’s heels with 860 stores and 1,100 expected over the same time-frame.

With the cost of living crisis crippling household budgets, a new golden age beckons for the two retailers. It is no coincidence that Aldi gatecrashed the big four during August, the same month that food price inflation hit a record 12.4pc, pushing up the average annual grocery bill by £571 to nearly £5,200.

Prices rose most sharply for the sort of staples – milk, butter and dog food – that the discounters specialise in.

Meanwhile, Kantar data shows sales of the very cheapest value own-label products jumped by a third during the 12 week period to the beginning of September. Nearly one in four baskets now contains a budget line, with overall spending on own-label products almost topping £400m in the latest four weeks.

A warning from Ocado of smaller basket sizes and customers trading down is a further sign of where the market is heading.

With prices going through the roof, it is no surprise that customers are visiting Aldi and Lidl in droves. Aldi’s sales rose by 18.7pc over the 12 weeks to Sept 4, reaching a 9.3pc market share and making it Britain’s fourth largest supermarket for the first time.

Shoppers were “voting with their feet by choosing Aldi over full price traditional supermarkets”, UK and Ireland boss Giles Hurley said gleefully after more than 14m people visited an Aldi store over the summer. Sales at Lidl grew by 21pc and its market share increased to 7.1pc.

But the reshuffle says just as much about the fate of Morrisons. In contrast to Aldi’s meteoric rise, the chain’s decline has almost happened in slow motion. Arguably the company never really recovered from the huge upheaval that followed its £3bn-plus takeover of Safeway in 2004.

More recently, there have been some green shoots. In the months leading up to private equity’s interest, repeated market share gains had left it with a 10.4pc slice of the spoils but the revival was short lived.

The grocer’s struggles are underlined by the fact that sales across the entire sector have increased by 3.8pc, the third monthly increase in a row. Yet Morrisons was the only one of the big four to experience a fall in sales over the threemonth period, with turnover tumbling 4.1pc. Though Tesco, Sainsbury’s and Asda have also seen their market share slide in the last 12 months, the trio all racked up their best sales since April 2021, according to Kantar. Waitrose was the only other big name to see sales fall.

The distraction of months of protracted takeover talks with two competing parties won’t have helped Morrisons’s fortunes but it is its ability to juggle billions of pounds of loans in a rapidly tightening credit market that is most concerning. The tie-up has been compared to Terra Firma’s disastrous buyout of music publishing giant EMI just as the financial crash was about to erupt on Wall Street in 2007.

With large debts to service, bonds to refinance, and interest rates shooting up, Morrisons’ ability to compete with Aldi and Lidl by lowering prices is seriously constrained.

Balance sheet strain will also be a major test of a pledge by the new owners to keep Morrisons largely intact, and of non-binding guarantees made in the heat of takeover battles more generally. Among the oversights that the board of Morrisons was guilty of was a failure to extract concrete, legally binding commitments to maintain investment, preserve jobs, protect the supply chain and avoid selling any major assets.

There was a time when supermarket executives used to downplay the threat of the discounters but not any more. On the contrary, with Lidl now growing even faster than Aldi, there will be panic in the aisles.

‘Aldi gatecrashed the big four the month that food price inflation hit a record’