Doubts over Somerfield

Doubts have been cast over the growth potential of Somerfield, the high-street grocer, after its pounds 525m flotation in July.

The float was announced last week after one of the company's 40 creditor banks withdrew 11th-hour objections to the plan. It had argued for a trade sale instead.

Robert House, a management consultant and retail specialist at the Coba Group, a leading strategy consultancy, said the turnaround accomplished by David Simons, Somerfield's chief executive, had been remarkable. "But from here on, there seems less scope for manoeuvre." The company, he added, was good in parts.

Fears for the prospects of the group could hamper its attempts to pay down its debt. Some pounds 400m from the offering is supposed to go to Somerfield's lenders. The balance will be paid to the banks that acquired the company after the pounds 2.1bn leveraged takeover of Gateway by Isosceles in 1989 was crippled by indebtedness. The group had sales of over pounds 3bn last year, and made an operating profit of pounds 65m.

Mr House's concerns mirror those of some stock market analysts, who have highlighted the following problems:

o Its weak national brand will require higher advertising and marketing costs. "The national brand is very important for a business like this, especially if it wants to expand," said Mr House.

Its ambition to open 10 new stores a year will be further hampered by the clampdown on planning consent.

The rump of the Gateway chain, 225 shops, are to be upgraded to the Somerfield format by the end of next year, but may not lift margins as much as earlier conversions. "The uplift from these stores will be less than what has been seen to date at Somerfield," he predicts.

Food Giant, a chain of 28 discount stores, has failed to catch shoppers' imaginations and looks set to be a problem division.

However, he conceded that the Somerfield concept had performed extremely well, especially its fresh food lines.

One analyst believed there was "probably a little more to squeeze out of the business."

A spokesman for the company, however, rebutted the claims. He said the conversion of Gateway stores to Somerfield had been done on a regional basis, and not in any way on the potential of individual stores. New stores would not attempt to compete head-on with Sainsbury and Tesco. "It's more

likely there will be additional neighbourhood stores in places where the brand is already established."

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