Argyll sees more growth in store

The Investment Column
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The Cassandras have been saying for years that UK supermarket groups are facing saturation, but the hard evidence remains thin on the ground. The latest problems of Sainsbury and Kwik Save appear self-inflicted and Argyll, owner of Safeway, remains confident there is still plenty of scope for new superstores in the home market.

Certainly, yesterday's results for the year to March show few signs of slowdown at the owner of Britain's third-largest food store chain.

The figures were distorted by some one-offs, but an underlying profits rise of 7 per cent to pounds 401m was a creditable achievement in a year that has seen thousands of job losses and a complete upheaval in the business. More importanly, after five years of rises averaging 0.2 per cent a year, like-for-like volumes shot up 4.7 per cent in the core Safeway chain last year. There has been no let-up into the new year, either, with like-for- like sales 6.1 per cent ahead in the first six weeks. Clearly, Argyll's drive to win customers is working. It has selectively cut prices, its ABC loyalty card rolled out last autumn is held by nearly 4 million customers and it has taken the initiative on innovations such as dry-cleaning, self- scanning at checkouts and creches.

The latest move to bring the group name and the Presto chain under the Safeway umbrella is the logical conclusion of these efforts to focus on and build the key brand. It all looks eminently sensible, but supermarkets are clearly having to work much harder to hold their own and Argyll's room for manoeuvre is becoming more constrained.

Last year's sales rise was won at some cost to margins, which fell 0.1 per cent to 6.9 per cent at Safeway. Cost savings could not quite offset the 1.1 percentage point hit as a result of "fiercely competitive market conditions" and the loyalty card launch. Those competitive pressures show no sign of letting up.

Meanwhile, the group's store opening programme continues to decelerate. Sixteen or 17 a year will now be the norm, compared with 26 as recently as two years ago, while capital expenditure will fall from last year's pounds 461m to under pounds 400m by 1998.

Emphatically ruling out any adventures overseas a la Sainsbury and Tesco and with cash neutrality impending next year, Argyll seems inexorably being driven to use its spare capital to buy back shares. It is therefore significant that it has already decided to raise its request to shareholders for authority for share buy-backs from 4.4 to 10 per cent. If profits rise to pounds 455m this year, the shares, down 3p at 340p, stand on a lowly multiple of 12 and look a low-risk bet on the sector, even if growth is never again likely to match the heady rates of the 1980s.