Somerfield chief pays the price for profits warning

Somerfield, the struggling supermarket group, axed its chief executive yesterday as the company issued a grim profits warning which pushed the shares close to their all time low.

Alan Smith will leave the company with a pay-off of about £400,000 as John von Spreckelsen, Somerfield's executive chairman, assumes full executive responsibility for the group. Mr Smith, who joined from Punch Taverns two years ago, becomes the second executive to leave the company in a matter of days. Martin Gatto was replaced as finance director last week with Steven Back joining from the rival chain Budgens. Mr Gatto is in line for compensation of almost £300,000.

Somerfield shares sank almost 50 per cent in early trading as the company warned that operating profits for the year to date were the same as last year's level. It said operating profits for the full year to April would be similar to last year's £28m. City analysts had been forecasting pre-tax profits of £30m to £40m for the year but have now cut them to £16m. The shares closed down 45p at 50p.

The company, which also owns the Kwik Save stores, blamed the shortfall on deteriorating market conditions and "material deflationary pressure". However, it said like-for-like sales in the first seven weeks of the second quarter were 1.7 per cent ahead of the same period last year.

Philip Dorgan, an analyst at WestLB Panmure, said: "This is a business which has found it difficult to grow the top and bottom line at the same time. The business isn't going bust but if you haven't got the assets or the brands it is a struggle."

Somerfield has been hit hard by increasing competition as the major supermarkets such as Tesco, J Sainsbury and Asda battle it out for dominance in the UK. Sainsbury's last week reported underlying sales growth of 2.4 per cent while Tesco last month reported like-for-like growth of 3.9 per cent.

Ian McDonald at Numis Securities commented: "A few years ago you went to Kwik Save to buy branded products at low prices. But with Tesco and Asda turning the price screw, the reason to go is gone. The shops are poorly located and under-invested."

Somerfield has been a long-term struggler, suffering from a weak brand name and a poor portfolio of stores. After its merger with Kwik Save the previous management converted many of the Kwik Save stores to the Somerfield brand but found many customers preferred the discount format. It is testing new designs for Kwik Save.

Somerfield said Mr von Spreckelsen would retain his title of executive chairman rather than move to the chief executive position. With no plans to recruit any more executive directors there may be questions about the corporate governance at the company.