Somerfield shares fell 12 per cent to 189.5p as the company revealed that underlying sales at Kwik Save in the 16 weeks to August had fallen by 12 per cent. Somerfield, which had a merger approach to Safeway rejected earlier this year, admitted that trading profits were pounds 20m below last year and could decline further.
As analysts cut their profit forecasts from around pounds 200m to pounds 150m some said the merger with Kwik Save was a "deal too far" for the struggling retailer. "It was a disaster waiting to happen," said Phillip Dorgan at WestLB Panmure.
The main problem has been the 349 Kwik Save stores, which Somerfield has decided cannot be converted to the more mid-market Somerfield format. Sales in these stores are down by around 13 per cent.
To help solve the problem it is planning to improve product availability and spend pounds 160,000 upgrading each store. The new managing director of Kwik Save, Simon Hughes, has also been asked to test a series of new initiatives designed to kick-start sales.
Somerfield declined to comment on whether larger parts of the Kwik Save portfolio might be closed, but analysts see some closures as inevitable.
Analysts said the Kwik Save stores would act as a "poison pill" that could deter possible bidders for Somerfield as consolidation continues to accelerate in the European supermarket sector.
Mr Dorgan said: "Somerfield would have struggled on its own but someone on the Continent might have snapped it up eventually. But with Kwik Save, who is going to go near it?"
Somerfield will upgrade 140 Kwik Save stores during the current financial year and the balance of the stores will be upgraded next year.
Another 461 Kwik Save outlets are being re-branded under the Somerfield brand name. Like-for-like sales at these shops were down 10.8 per cent between April and August.
Sales at the first 70 stores to be converted achieved an uplift in sales on average of 5 per cent. The next phase of conversion will start after Christmas and will run at about eight stores a week.
Somerfield said it had been hit by an increasingly competitive market, with rivals such as Tesco, Asda and Safeway all announcing price campaigns in recent weeks.
Wal-Mart's pounds 6.7bn takeover of Asda earlier this year has put pressure on all the other supermarket groups with middle-ranking chains such as Somerfield particularly vulnerable.
Somerfield is now having to reinvest almost all of the pounds 70m synergy benefits achieved from the Kwik Save merger in lower prices. "All they can do is work hard to try and tart themselves up for the next round of merger talks," one analyst said.
Somerfield has experienced a roller-coaster ride in its three years on the stock market. The price of its shares had to be cut twice to get the float away. At the last minute, after pricing the shares at 145p, the group's advisers Kleinwort Benson offered the group for sale to rival supermarket groups such as Tesco and Safeway.
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