Safeway pinches its own: Shares in Argyll Group slip as profits rise 14 per cent

UNDERLYING sales volumes at Safeway, the number three grocer to Sainsbury and Tesco, fell in its second half as newly opened superstores pinched customers from existing Safeway stores nearby.

The stock market reacted calmly to the news of increased 'cannibalisation', marking the shares down 3p to 314p as Safeway's parent, Argyll Group, reported a 14 per cent increase in annual pre-tax profits to pounds 417.3m.

The 0.4 per cent fall in Safeway's like-for-like volumes in the second half to 3 April proved temporary, between a 1 per cent increase in the first half and a 0.2 per cent rise in the first few weeks of the new financial year.

Fears of market saturation - in the wake of ambitious opening plans of the big three and discounters - have depressed supermarket share prices in the past few months. Sainsbury

has kept like-for-like volumes growing, but Tesco last year saw its underlying performance slip for a while.

David Webster, deputy chairman of Argyll, played down the volume decline, which was partly due to new stores in Glasgow and Edinburgh taking customers from existing Safeways: 'It has been happening to Sainsbury 's in London for 10 years.'

The City was simplistically looking at volumes, rather than the sales mix, which showed a strong performance from high-margin fresh produce, he said. Sales declines came in lower- margin packaged groceries. And, unexpectedly, when discounters opened near Safeways, they boosted sales because other retailers were squeezed out.

Group capital spending this year will rise from pounds 611m to 'not more than pounds 650m', which will represent the peak for the foreseeable future, Argyll said. Safeway plans to open 24 stores this year, down from 30 last year.

Total Argyll sales grew by 10 per cent to pounds 5.54bn and operating profits rose 18 per cent to pounds 387m. The final dividend of 7.35p makes a total of 10.9p, up 12 per cent.

Argyll has stepped up investment in its smaller Presto and Lo-Cost chains. Together their sales fell 2 per cent to pounds 1.12bn, hit by the sale of the Liquorsave and Winterschladen drinks businesses. Difficult trading conditions in the North-east affected Presto.

Argyll chose not to adopt the new FRS3 accounting rules for prior years. If it had, profits would have fallen, because the pounds 100m out-of-court settlement paid to it by Guinness in the previous year would have been recorded above the profits line.

The company accused Sainsbury of being 'misleading' with its recent claim that Safeway prices were 41 2 per cent higher.