UK's food giants may fall victim to foreign bids

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The Independent Online

The downward pressure on supermarket prices is likely to trigger rapid consolidation in the food sector, cutting the number of major players in the British grocery market from the current five to three - or even two - within the next five years.

The downward pressure on supermarket prices is likely to trigger rapid consolidation in the food sector, cutting the number of major players in the British grocery market from the current five to three - or even two - within the next five years.

A report published by Verdict, the retail analysts, says that of the five major UK chains, Somerfield, which is already in a "desperate situation", and Safeway, which is struggling under the burden of the KwikSave acquisition, are the ones most likely to go.

The report, which comes on the day that Stephen Byers, the Secretary of State for Trade and Industry, is due to receive the Competition Commission's report on supermarket pricing, will heighten fears that lower prices and trimmed profit margins will lead to several of Britain's supermarket chains being swallowed by European players in the next few years.

The Competition Commission report, the result of an 18-month inquiry, has led European supermarkets to put possible takeover plans involving UK rivals on hold. Mr Byers is expected to publish the report in September. Should the sector be largely absolved of accusations of overcharging, as Verdict expects, then an upswing in deal making by such continental retailers as Metro and Ahold is thought inevitable.

There has been growing speculation that the Competition Commission will urge the Government to force Britain's biggest supermarkets to reveal their prices on the internet so shoppers can find the cheapest offers.

It is also thought that the commission wants to force supermarkets to provide their prices, and the profits they make on each item, to competition watchdogs on a semi-annual basis, as well as making them available to customers on the internet.

Verdict's key conclusion in its examination of likely food and grocery prices through to 2005 is that the Government's case for "rip-off-Britain" will remain unproven. Recent lower price rises in the food sector, and the takeover of Asda by Wal-Mart of the US, mark the start of a long-term trend that will see increasing downward pressure on food prices and the disappearance of some major supermarket chains as they are absorbed through mergers or acquisitions.

Richard Hyman, a research director at Verdict, said: "Anyone who thinks last year's price deflation in the food sector was a flash in the pan had better ready themselves for another five years of surprises. Lower prices and lower margins will dominate trading to 2005."

The key aim of the commission's proposals is to ensure price transparency so that consumers can make easy comparisons between the prices of the five biggest supermarket chains; Asda, Tesco, Sainsbury, Safeway and Morrisons. The Commission is also expected to urge Mr Byers to introduce measures to allow careful monitoring of profit margins.

Verdict notes, however, that 1999 marked a watershed for the British food and grocery sector as sales growth slipped below 4 per cent for the first time in over a decade. For the next five years, Verdict believes that price inflation, excluding tax increases on tobacco and drink, will be 1 per cent or less, while the price of core food products is likely to be deflationary.

Price competition in the sector is also to rise further as Asda and Tesco embrace everyday low pricing. Following the Wal-Mart example in the US, they will aim to support lower prices through productivity gains underpinned by better logistics, inventory control, product availability and increased customer traffic.

"This represents a fundamental strategic challenge to companies like Sainsbury and Safeway, both of whom are far more focused on food," Mr Hyman said.

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