Bottom Line: Argyll signals end of the retail banquet

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ARGYLL GROUP may have stopped short of admitting that its decision to depreciate its stores means that it expects lower returns from its portfolio in future, but the market is not fooled. It simply confirmed that the glory days of food retailing are at an end: price wars and ambitious store opening programmes mean returns like the 28 per cent Safeway enjoys on its newer stores must soon become a thing of the past.

Sir Alistair Grant, Argyll's chairman, may be right in his conviction that the product range and geographic coverage of Safeway, Sainsbury and Tesco mean they will survive the threat from discounters and warehouse clubs. But the City is more worried about the price war between those three than the impact of the cut-price chains. Investors are also shoppers: they can see the impact of superstore openings without waiting for confirmation from the minimal like- for-like sales growth being reported by the big three.

Argyll's pounds 100m cut in the current year's capital spending, with the prospect of further reductions to come, is a tacit admission that there is limited scope for opening new stores without hitting existing sales. But it still leaves the group well short of being able to fund its opening programme from cash flow - spending would have to be cut to between pounds 350m and pounds 400m to be cash-neutral.

The 23p fall in its share price to 256p, despite post-Budget euphoria, owed more to disappointment that the capital spending cut is not being passed on in higher dividends and to the poor sales growth than to the pounds 40m extra depreciation.

The quality of Argyll's management - underlined by the succession plans announced yesterday - makes it one of the better-placed in the sector. But a forward p/e of 11.4 times, based on full-year profits of about pounds 350m, shows that the market is unwilling to commit itself until the full implications of the price wars become clear.