Outlook: Who's next in retail merger stakes?

OUTLOOK: FOR UK supermarkets the pressure just keeps growing. Already faced with the Competition Commission investigation on one side and Wal-Mart's takeover of Asda on the other, now the French are bulking up across the channel.

The pounds 30bn merger between Carrefour and Promodes creates a French national champion that will make it the largest retailer in Europe, and the second largest in the world after Wal-Mart. As the quest for scale continues, supermarket chief executives in Britain must be nervously fingering their strategy documents. Should they, could they, go it alone? Or must they join the rush for partners as the major players combine?

In France, the hypermarket groups had to do something to combat the Wal- Mart threat. Wal-Mart wants to be number one in Europe and it cannot achieve that aim without tackling the second largest economy in the euro-zone. With Wal-Mart already parked on the supermarket lawn here in the UK, what can Tesco, Sainsbury's et al do to shore up their positions? They would dearly love to follow the French model, but given the government's stance on supermarket prices and market power, it seems unlikely that any domestic mergers would be countenanced.

Instead, pan-European deals may be the answer. Sadly, it seems unlikely that UK groups would be the senior party in many of the possible groupings. Just as France is again demonstrating its willingness to create national champions, the UK may be forced to stand by and see one of its most highly regarded industries swallowed up by Johnny foreigner.

Tesco would be the prime target in any such process, as this consolidation seems not to be about the good taking over the bad and turning them round. It is about top companies joining forces to form world-beaters. The next 12 months therefore look like being a nervous game of corporate musical chairs. Two players - Carrefour and Promodes - have already removed themselves from the game. The race is on to be next.

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