Co-op 'fifth biggest' after Somerfield buyout

The Co-op today hailed its return to the big league of food retailing thanks to a £1.6 billion takeover of rival Somerfield.

The deal - the biggest in its history - cements the Co-op's position as the UK's fifth biggest food retailer, creating a chain of more than 3,000 outlets with a market share of 8 per cent.

Retail giant Tesco currently leads the way with 31 per cent of the UK's £120 billion grocery market, followed by Asda and Sainsbury's with around 16 per cent and Morrisons which has more than 11 per cent.

Co-op chief executive Peter Marks said the Somerfield acquisition, which is subject to regulatory approval, meant "people should now be referring to the 'big five' retailers" rather than the big four above. It provided "rocket fuel" for the group's growth plans and was good news for consumers, he added.

Mr Marks said convenience stores were already winning customers from their bigger out-of-town rivals thanks to higher fuel costs persuading more people to shop locally.

"We will create a stronger fifth player in food and a convenience store chain with unrivalled geographic reach," he said.

"In terms of the convenience market, it has been been growing at a faster rate than the grocery market itself.

"People are concerned about time, but also about the cost of fuel.

"When they are making a decision 'do I drive five miles to a superstore or do I go down the bottom of the road and visit my local Co-op', that's affecting their decision making."

Somerfield, which is owned by a consortium including property tycoon Robert Tchenguiz, private equity firm Apax and investment bank Barclays Capital, has around 880 stores and generated £4.2 billion of net sales in the year to April.

Its owners were reported at the weekend to be looking for a price of £2.5 billion.

Mr Marks said: "We think we have got a very good deal, but it's a good deal for Somerfield in the current climate."

He added that competition watchdogs would likely require some of Somerfield stores to be sold.

"We will be working with the Office of Fair Trading to analyse which stores and how we deal with them," he said.

Other food retailers are expected to be interested in any of the disposals, Mr Marks added.

The takeover will result in "very significant" cost benefits, he said, which will be passed on to consumers. A "limited" number of job losses will also result, but it was too early to say how many.

Completion of the deal was expected within a few months, after which the Somerfield brand will disappear, Mr Marks said.

The Co-op's 2,300 food stores enjoyed a 4.7 per cent like-for-like sales rise during the first half of the year, while Somerfield's sales experienced "similar" growth.

Manchester-based Co-op, which is a mutual company with 2.5 million members, unveiled a three-year plan in April to double profits and invest £1.5 billion in transforming its retail estate.

As well as currently being the UK's fifth largest food retailer, it is the third largest pharmaceuticals chain, the biggest provider of funeral services and the largest independent travel business in the country.

The business can trace its roots back to 1844, when the Rochdale Society of Equitable Pioneers was created by 28 impoverished weavers and artisans after being forced back to work after a strike. Each put £1 into the kitty and they opened up a shop selling food they would not have been able to afford.

The Co-operative Wholesale Society was formed in 1863, and by 1955 British co-operatives boasted a food market share of 20 per cent.

Its business was challenged by reward card schemes from rivals such as Sainsbury's and Tesco, and the group got a rude awakening with a very public hostile takeover attempt in 1997. The bid was thwarted as a result of the steadfast commitment, both by individual and corporate members, to its ownership structure.

Since then the group has differentiated itself by pioneering in areas such as Fair Trade products.

Somerfield began life as JH Mills in Bristol in 1875, but changed its name to Gateway in 1950 because the city was the "gateway to the West Country". The group dropped the Gateway name in 1994 to become Somerfield and listed on the Stock Exchange two years later.

It was taken private by its current owners in a £1.1 billion deal in December 2005.

Somerfield chief executive Paul Mason said today: "With Somerfield and the Co-operative Group as one business, we believe that we can learn from each other's strengths to ensure we continue to develop the best local grocery shops in Britain."