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Another convenience setback for Sainsbury?

13-Apr-2004

Sainsbury's interest in UK convenience store operator TM Retail appears to be waning after the multiple grocer's offer for the business was rejected by its owners. But this could be no bad thing for Britain's number three food retailer, suggests Chris Jones.

According to UK press reports, Sainsbury made an offer for only a handful (between 100 and 300) of TM's 1,200 stores, which trade under the Forbuoys, McColls and Martin's. But the group's owners, private equity firms Montagu Private Finance and Electra Partners, are keen to sell TM as a single unit, seeing greater value in this than in dividing it up piecemeal.

Furthermore, the reports suggest that the £230 million bid Sainsbury is thought to have made falls some way short of the valuation TM has put on its main store operations.

 

Sainsbury has not commented on the reports, while all TM would say was that negotiations were ongoing, according to Reuters, but likelihood of a deal being reached is now looking increasingly unlikely.

 

On the other hand, the press reports also suggest that the Co-op, itself a major player in the UK convenience store sector, could be interested in some of the TN outlets, and this certainly makes more sense. A number of the stores acquired by the Co-op through its acquisition of the Alldays and Balfour chains were very similar in trading style to the TM outlets, and the company has a much better track record when it comes to integrating this type of business than Sainsbury.

 

However, the Co-op is also thought to be interested in only a few TM stores - 200 or so - and the question remains as to whether the investment groups will go ahead with the piecemeal sell off of the 1,200 outlets.

 

Sainsbury's likely failure to acquire the TM business could be seen as yet another failure by the company as it seeks to re-establish its credentials as a serious contender in the UK supermarket sector, but it could prove to be a lucky break in the longer term.

 

The comapny now has a new chief executive in the form of Justin King, a former M&S executive, and he will be looking both to build on the new foundations put in place by predecessor Sir Peter Davis (notably a complete overhaul of the company's store portfolio, product ranges and supply chain functions) and to impose his own vision for the future - including a clearer strategy for the fast-growing convenience store sector.

 

While there is no indication that King's arrival played a part in Sainsbury's apparent cooling of interest in the TM group, he is unlikely to be overly disappointed if the deal does not go through, giving him a clean slate on which to draw up a more coherent strategy for the convenience sector.

 

Sainsbury has made no secret of the fact that moving into the convenience store sector will play a major part in its future strategy, but while there were clear synergies from the acquisition last month of upmarket convenience store operator Bells, the move for the largely non-food-led TM stores made less sense.

 

The majority of TM's outlets are newsagents, supplying papers and magazines along with a limited range of everyday food and drink items (bread, milk, confectionery, etc.), and while Sainsbury was perhaps more interested in the location of TM's stores than their current trading format (given that it would inevitably refit any outlets it acquired to its own Local banner), its apparent offer for just a few stores suggests that most of TM's stores simply did not meet Sainsbury's requirements.

 

Sainsbury's chief rival Tesco already has a major head start in the convenience store sector, having acquired both T&S and Adminstore in the last two years, and is well on its way to achieving its goal of 1,000 stores trading under its Express banner.

 

Sainsbury has a more modest 80 convenience stores, including a number on Shell petrol station forecourts, but narrowing the gap with Tesco is not simply about acquiring more outlets, it is also about buying the right kind of stores in the right location - and there are probably better choices for Sainsbury than TM in this regard.