Outlook: Supermarkets need an Oftrolley

Any casual observer of Somerfield's share price over the past month must be wondering what's going on. Once cruelly dubbed "the mausoleum of UK food retailing" by one City analyst, Somerfield's share price has increased by 40 per cent in a matter of weeks. Given that poor old Kleinwort Benson could scarcely give the thing away when it floated 18 months ago, this is going some. The story is that a bid is just around the corner, but is this really credible?

Sainsbury's and Asda both claimed to be not much interested yesterday and if they are not going to bid, who on earth is? At this stage the best explanation of Somerfield's soaraway share price is that it's just another New Year ramp. All the same, there is little doubt that the big players of this industry are itching for consolidation to take place. If they could take each other over, they would.

While the Big four make great play of their ability to grow organically, the truth is that in a low inflation environment and with planning restrictions hampering their ability to open superstores at anything other than a snail's pace, they are going to find it virtually impossible to maintain growth rates out of internal development alone.

While the major supermarkets might feel they need consolidation, the rest of us need it like a hole in the head. According to new figures by Verdict, the top dozen food retailers now account for 70 per cent of the UK's pounds 93bn grocery market. The "Big Four" - Tesco, Sainsbury's, Asda and Safeway - make up almost half of it.

For such a huge market, this would already seem to be excessive. Any further increase in the market power of the big four would certainly reduce consumer choice and lead to higher prices. While a combination of say Asda and Somerfield would establish a player not as big as the two market leaders, it could still be expected to establish a number of local monopolies. The existence of another dominant player in the market would also put further unacceptable pressure on suppliers and smaller food retailers.

The power of the supermarkets is already such that policy consideration might perhaps seriously be given to regulating them rather in the same way as the utilities. The suggestion of an Oftrolley is daft as it might seem. Certainly if supermarkets are allowed further to consolidate, some method of ensuring that the benefits are shared between customers and shareholders would have to be found. Let's start with a pricing formula of say RPI minus 10. That ought to stop them in their tracks.

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