Investment Column: Kwik Save slow to arrest decline

Whoever takes over from Graham Bowler next summer faces an enormous task. Kwik Save, squeezed between the supermarket majors on the one hand and the continental discounters on the other, is struggling hard to justify its existence.

Pre-tax profits of pounds 73.7m for the year to August were well down on the pounds 90.3m achieved last year and look likely to continue to fall, with shoppers deserting the chain in droves. Like-for-like sales during the year fell 4 per cent while the industry as a whole reported a 5 per cent rise. In the eight weeks since the end of the financial year there has been a further 6 per cent decline.

Kwik Save has spent a fortune on advice from Andersen Consulting, which seems to have concluded that Kwik Save's shops should be more like the Tesco and Asda ones its customers are flocking to. It is hard to see how that strategy can work, however, when the only reason for Kwik Save being there at all is that it offers something the others do not.

The company's main challenge is deceptively simple - to persuade its existing customer base to spend more. The New Generation stores, currently being rolled out, though at rather a snail's pace, now focus more on fresh produce, but most shoppers seem likely to continue to use Kwik Save only for cheap commodities.

Key to this year's results will be how successful Kwik Save proves to be in using a roll-out of its own brand labels to increase its gross margin. With sales, even after a forecast 4 per cent decline this year, expected to be around pounds 3bn, profits are highly sensitive to small movements in the return on turnover. Squeezing another 0.8 per cent of gross margin after last year's 1.1 per cent rise could result in pre-tax profits this time of pounds 66m, analysts believe, but growth of half as much would peg profits back to pounds 54m.

At 325.5p, up 2p yesterday, Kwik Save's shares stand on a prospective price/earnings ratio of 13 or 15, depending on which view you take on margins. Despite a net yield of over 6 per cent, the shares, at less than half the level they reached only two years ago, remain unattractive