Argyll unloads 101 Lo-Cost stores

ARGYLL, the Safeway store chain, is abandoning the discount retail market for good with the sale of 101 of its Lo-Cost stores to Co- operative Retail Services.

With the stores goes the Lo- Cost brand name, a freehold warehouse in North Wales and leases to two further distribution depots.

The final amount paid by the Co-op will be linked to the average store sales in the next two months, but is likely to be between pounds 86m and pounds 100m.

In the year to April the Lo-Cost division contributed 10 per cent of the group's pounds 5bn sales. Profits of pounds 6.3m represented less than 5 per cent of the group's total.

Yesterday's sale marks the latest phase in the sell-off strategy first outlined by Sir Alistair Grant, Argyll's chairman, in April. Answering criticism of falling profits, he signalled his intention to dispose of non-core retail outlets, cut costs and launch a low-price range of own products.

In August he began the disposal with the sale of 123 Lo-Cost and 28 small Presto stores to Spar for pounds 19.7m. These were mainly the most poorly sited properties in the portfolio. Yesterday's announcement marks the latest phase in the disposal. 'We are now able to focus our resources and management effort on Safeway and Presto, our two lead businesses,' Colin Smith, chief executive, said.

Argyll retains ownership of 50 stores with a total sales area of 115,000 square feet, which will be either sold or closed. It made a pounds 3m write-off to cover these closure costs.

Yesterday's deal, which had been well flagged, had a muted reception in the City. The shares closed unchanged at 265p.

'It is good news,' said Andrew Kasoulis, of S G Warburg. It was a full price and the stores had not fallen into the hands of discount competitors, he said.

Recently Argyll has been in bad odour with the City for its reluctance to join the supermarket price war which has already sucked in its competitors Tesco, Sainsbury and Safeway.

Its policy was criticised further in May when the group reported a 13 per cent decline in profits to pounds 361m. This drop was partly attributed to the poor performance of Lo-Cost, where operating margins were squeezed down to 1.3 per cent.

After months of agonising, the group succumbed to City pressure and launched a new 100-product range of own-label tertiary products, 'Safeway Savers'. This initiative will be supported by a pounds 7m advertising campaign.

News of the third part of the strategy, to reduce costs, is expected at the interim results at the end of next month.

Mr Kasoulis said he did not expect the Lo-Cost sale to have any impact on the bottom line because the loss of pounds 6.3m profits would be offset by a reduced interest charge.