View from City Road: Sainsbury's US move makes sense

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The Independent Online
Having been pipped at the post by Tesco for control of William Low in July, Sainsbury's second big push into the US grocery market could not have surprised anyone. While the Scottish retailer would have provided useful geographic spread in the UK, the acquisition of Giant is of much greater strategic significance.

With fewer and fewer opportunities for growth left in the UK, Sainsbury has nowhere else to go except overseas. Giant, with 159 stores based in the affluent region around Washington DC and Baltimore, is perfectly placed for the purpose, adjacent to Sainsbury's existing Shaw's chain in New England and in a market that the group now understands pretty well.

It is a potentially big deal, however, with sizeable risks. The pounds 205m Sainsbury is shelling out in the first instance acquires 50 per cent of the votes but just 16 per cent of a company that was valued at dollars 1.28bn before the announcement of the deal. Given that Sainsbury does not get outright control, Giant is certainly no snip at 20 times last year's earnings.

However, there seems to be plenty of scope for development. Giant will be used as a base for other add-on purchases in what is a much more fragmented market than the UK. The proportion of high-margin own-label products will also be increased.

In the UK almost two-thirds of Sainsbury's sales are of own-label goods, which because manufacturers do not have the expense of creating brand loyalty, produce a better return on sales for retailers.

At Giant the equivalent figure is just 20 per cent, less than the 25 per cent at Shaw's and way behind Tesco, where less than half of sales are of own-brand goods.

Giant is already clearly a high quality company with margins twice the industry average and sales per square foot that easily outstrip American rivals. It may be difficult to achieve further improvement, even assuming Americans buy the own-label formula on the same scale as the British.

However, provided Sainsbury can move swiftly to gain outright control - which may not be hard given that the other voting shares are in the hands of Israel Cohen, the 83-year-old former chief executive - the deal appears to make a good deal of sense.