View from City Road: Still in the market for overpriced goods

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The Independent Online
Sainsbury's trumping of Tesco's bid for the William Low Scottish supermarket group speaks volumes about the state of retailing south of the border.

Scotland is a side show for the big supermarket chains, accounting for less than 10 per cent of the UK market. It has become a battleground simply because it is an easier place to fight than the highly competitive south.

Buying market share in England is much more difficult and expensive than in Scotland. Only one large quoted supermarket group, William Morrison, is for sale and, with a market capitalisation of pounds 1bn, it is nearly five times more expensive than the pounds 210m Sainsbury is offering for Wm Low. There is also less scope for improving profits at Wm Morrison than at Wm Low, where Sainsbury is asserting it could knock 8 to 10 per cent off the latter's prices to boost sales.

That is one reason Sainsbury is probably not over-paying, even though its offer beats Tesco's recommended bid by more than a third, a whacking 80 per cent premium to the pre-bid price.

Another is the fact that Sainsbury (or Tesco) can easily cut the cost of the exercise. It can sell the bulk of Low's 40-odd smaller stores to the middle- market groups such as Asda and concentrate on boosting revenues at the 17 big ones, where Wm Low gets barely half the sales per square foot that Sainsbury achieves.

Given that the deal is unlikely to damage earnings, the worst that can happen from Sainsbury's point of view, is that it will have forced Tesco to pay more than it intended. For the chances are there is another hand left to play in this game.

Tesco is hungry - it has had some success in catching Sainsbury, both in terms of quality and sales, and it wants to keep up the momentum. There is a smell of machismo in the air, and most analysts expect Tesco to cap Sainsbury's 305p a share offer with a counter-bid of 330p a share.

In the final analysis, the turnover involved in this skirmish amounts to less than 5 per cent of Sainsbury or Tesco's revenues; they can afford to pay too much for Wm Low, and will.