Somerfield plc

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Somerfield plc

Somerfield House
Whitchurch Lane
Bristol BS14 OTJ
United Kingdom
Telephone: (0117) 935-9359
Fax: (0117) 935-6566
Web site: http://www.somerfield.co.uk

Public Company
Incorporated: 1974 as Linfood Holdings Ltd.
Employees: 59,000
Sales: £4.61 billion ($6.64 billion) (2001)
Stock Exchanges: London
Ticker Symbol: SOF
NAIC: 445110 Supermarkets and Other Grocery (Except Convenience) Stores

Somerfield plc is a major grocery retailer in the United Kingdom, holding about a 7 percent share of the U.K. market. Unlike its major competitors who focus their energies on superstores located in edge-of-town sites, Somerfield concentrates on smaller “neighborhood” supermarkets—averaging less than 9,000 square feet per unit—located in-town (“high street” in British parlance). The firm’s stores operate under two names: Somerfield, an upmarket modern grocery format where the emphasis is on fresh foods, and Kwik Save, one of the largest discount supermarket chains in the United Kingdom. In 2001 there were approximately 585 Somerfield units and 725 Kwik Save units. Among the Somerfield outlets were about 20 that were gasoline minimarkets operated in partnership with Total Fina Elf S.A.

1875–1970S: Sleepy Roots

Somerfield traces its roots back to a single small grocery store opened in Bristol, England, in 1875 by J.H. Mills. By 1900, with 12 J H Mills stores in the fold, J H Mills Ltd. was formed. Fifty years later, Tyndall, a finance house based in Bristol, gained majority control of the company and changed its name and the name of the supermarkets to Gateway. The name was selected because Bristol was considered the “gateway” to England’s West Country. At the same time, the stores were converted into self-service supermarkets.

Meantime, in 1964, Frank Dee purchased the wholesaler that had been part of J H Mills. He then developed the Frank Dee supermarket chain in northern England, which soon had 70 units. Associated Food Holdings Ltd. purchased the Frank Dee chain in 1970 and then four years later merged with Thomas Linnell & Company Ltd. to form Linfood Holdings Limited. In 1977 Linfood acquired Gateway, and the number of Gateway stores located throughout the country soon increased to 100.

Early 1980s: Rapid Growth Under Monk

By the early 1980s Linfood was doing about £1 billion a year in sales. It was at this point that the company began a shortlived period of rapid expansion. At the zenith of this era in the mid-1980s, the firm was England’s third largest retailer of groceries and employed some 85,000 people. Leading the firm to this position was Alec Monk, who served as managing director from 1981 to 1989.

Monk was born in Wales in 1942, the son of a baker. After earning a degree at Oxford, he worked for Esso and then spent a number of years at Rio Tinto-Zinc (RTZ), a mining company, where he became a member of the board of directors at age 31. Apparently frustrated at RTZ, in 1977 Monk moved to New York and took a position with AEA Investors, a prestigious investment firm. After four years with AEA as a specialist in the buying and selling of midsized corporations, Monk was offered the post of managing director at Linfood Holdings. Monk admitted that before the offer he had never heard of Linfood, but he took the job and immediately began to shake things up.

When Monk arrived in 1981, he decisively reoriented corporate growth in the direction of retailing, eventually restricting wholesale activity to the cash-and-carry supply of independent grocers and caterers. Linfood had acquired a number of Carre-four retail superstores in 1978, and with these as a base Monk began to build his grocery empire. From the start, his reign was marked by continual corporate skirmishing, as Linfood bought one rival chain after another or was itself the object of takeover attempts. Just weeks after Monk had joined his new company, Linfood escaped the clutches of the aggressive James Gulliver when Gulliver’s £87 million hostile bid failed to gain approval from the Monopolies and Mergers Commission.

Having survived this early battle, Monk began his own campaign of acquisitions. In 1983 Monk converted the Frank Dee supermarkets into Gateway outlets, and he also changed Linfood’s name to Dee Corporation. In June 1983 Dee snapped up the 98 Keymarkets, topping Safeway’s bid with a £45 million offer, and in 1984 followed up with the purchase of 41 Lennons stores for £25 million. At the end of that year, Monk and Dee made a quantum leap with the acquisition, for £80 million, of BAT’s 380 International Stores. For the financial period ending in April 1985, Dee had amassed sales of £2.43 billion and profits of £64 million, making Monk one of the London financial world’s most celebrated stars.

The Dee collection of stores included many small, older markets located primarily on the “high street”—that is, near the center of urban concentrations—as well as a growing number of supermarkets and a sprinkling of superstores (stores larger than 25,000 square feet and including nonfood items). By unifying many regional corporations into one organization, Monk was able to eliminate management positions, benefit from economies of scale in advertising and food distribution, and cut better deals with his wholesale suppliers. With each new acquisition, Dee gained not only additional clout in the marketplace but also the particular expertise of each chain, as one group might have specialized in fresh produce, while another had made a name for its meat departments.

Mid-1980s: The Herman’s and Fine Fare Acquisitions

As Dee grew in size, its profits grew proportionately, and it appeared to those in the investment business that Monk might expand his retailing success indefinitely. When, in 1985, no further targets were available in the British food retailing sector, Monk decided to establish a U.S. base with the purchase of Herman’s, the largest retailer of sporting goods in the United States, for $414 million. With 130 stores and a reputation for skilled management, Herman’s seemed a good bet; but in retrospect the acquisition proved to be the beginning of the end for Monk and the Dee Corporation.

Like other tacticians before him, Monk had spread his forces too thin, and he compounded the error a few months later when he bought a very large and complex chain of 419 Fine Fare supermarkets. At the time—early 1986—both moves were generally praised, but a series of apparently unimportant events soon combined to thwart Monk’s plans. First of all, both the Herman’s deal and the £686 million Fine Fare purchase were financed by means of “vendor placings,” in which new shares in a company are sold without first being offered to existing shareholders on a pro-rated basis. This technique, common in the United States, was new to Britain, and it inevitably angered the institutional investors who held large blocks of Dee stock. Their displeasure became an important, although subtle, drag on the price of Dee shares at a time when Monk was most in need of investor faith in his ambitious plans. The institutional managers felt abused by Monk, and their resentment seemed to color their assessment of his company’s prospects.

Those prospects, however, no longer looked quite as outstanding from any angle. Monk’s efforts to make Herman’s into a nationwide sporting goods chain were a disaster from the beginning. As the chain expanded into new parts of the country it could not keep its shelves stocked efficiently and, when it did have merchandise, it was often poorly suited to varying local tastes. While sales went up, profits did not, and Monk soon found that he had transformed a well-run regional chain into a national mess.

Much more significant were the problems at Fine Fare, the chain that had boosted Dee into third place among British food retailers by sales (and largest in terms of square footage), but that proved to be much more difficult to integrate and streamline than Monk’s earlier purchases. As it turned out, Fine Fare’s stores were not in the excellent condition Monk had expected them to be, but suffered from deteriorated physical settings and widespread pilferage. In addition, Fine Fare’s wide range of store formats, from vast suburban “hypermarkets” to hole-in-the-wall city locations, only added to Dee’s already complex distribution and administrative problems. Converting all of these stores to Gateway’s logo, accounting system, and corporate standards proved to be more difficult than Monk had envisioned, or at least more costly than investors were willing to pay for.

Company Perspectives:

The Somerfield Group incorporates the Somerfield and Kwik Save supermarket business units which together operate over 1,330 stores nationwide.

Somerfield’s focus is on its key strength as the U.K.’s biggest neighborhood supermarket offering easy to shop convenience in its smaller high street stores with a focus on its fresh food offer, modern ready meals and a quality range of wines.

Kwik Save operates as a distinct value brand building on its heritage as the nation’s number one discount supermarket offering the biggest brands at lowest prices.

Late 1980s: Declining Fortunes and the Isosceles Takeover

For the year ending in April 1987, Dee’s first after the big mergers, the company was expected to earn around £230 million on sales of £4.8 billion; when the figure came in at £192 million many already disenchanted analysts said that Monk had gone too far too fast. As a result, Dee’s stock price faltered, drifting sideways while the market as a whole was booming along at a 45 percent faster clip. For the year and a half following the Herman’s purchase, Dee’s stock was dead last on the Financial Times’ list of the 100 leading companies in Great Britain. Monk defended the prudence of his moves, noting that he had predicted all along that it would take three years for Dee to assimilate its new acquisitions fully, which by 1987 also included the country’s fourth largest drug chain, Medicare, and two more American sporting goods outfits. He asked for patience and a little faith, two commodities always hard to buy on the world’s stock exchanges. Monk might have come through the crisis if Dee’s first half result for 1987–88 had been outstanding. However, the £64 million total announced in the fall of 1987 was 18 percent below the previous year’s midterm figure, and rumors of a takeover immediately began to circulate through the city. When the October 19, 1987, crash ruined the Christmas selling season for Herman’s, it was only an appropriate conclusion to Dee’s dismal year.

Even the stock crash could not prevent the beginning of a prolonged and bitter bidding war for what was now characterized as an overly diversified, poorly managed conglomerate. In December 1987, a British confectionery company called Barker & Dobson (B&D) offered Dee shareholders the equivalent of about £2 billion for their stock, charging Monk with incompetence and promising to sell off unprofitable parts of the Dee network. Monk fought back vigorously, however, spending millions of pounds sterling in defense of his company and its future prospects. Second-half profits for the fiscal year ending April 1988 were substantially better, cutting the total annual decline to only 3 percent, and the chairman could point to the company’s remarkable growth and the profits to be realized when all of its stores had organized themselves under the Gateway banner. When the votes were counted in the spring of 1988, Monk had won the battle easily and Dee appeared safe for the time being.

The grace period was short. Although Monk took steps to correct some of the problems Barker & Dobson had harped on, selling, for example, Dee’s Spanish distributing business and the original Linfood wholesaling subsidiary, it was only a year later that the second wave of predators made its attack. Dee had changed its name in the summer of 1988 to Gateway Corporation, emphasizing its commitment to the retailing end of its business, but to David Smith it was still the same bloated, underpriced temptation. Smith had been a financial advisor to B&D during its unsuccessful bid, and, backed by a variety of large investors, including the British investment bank S.G. Warburg, he launched his own strike, under the name Isosceles PLC, in April 1989. After intense competition from a number of other bidders, including a company called Newgateway PLC, put together by the Great Atlantic & Pacific Tea Company and dealmaker Was-serstein Perella & Company, two U.S. companies—Isosceles emerged the winner in July of that year, buying up a bare majority of the stock to force out Monk and his board of directors.

Smith wasted no time implementing the policy B&D had urged two years before, selling off 61 of Gateway’s largest superstores to the ASDA Group plc for £705 million and repositioning the company as an operator of mostly midsized, high-street retail outlets. Gateway would no longer try to compete with the big out-of-town and edge-of-town grocers, but would fill the somewhat smaller niche left in-town by the emergence of the suburban superstore.

The Gateway takeover, however, got off to a rocky start. In December 1989 Isosceles launched an offering to help unload some of its $2.1 billion in debt, but was unable to find buyers, and its 16 underwriters were left holding $848 million more in paper than they had expected. Further asset sales had been expected, including the divestments of Herman’s, a group of 110 stores in Scotland and the north of England, and the F.A. Wellworth & Co. supermarket chain in Northern Ireland. But the only other immediate sale was that of the Medicare drugstore chain, which was sold for only £5 million in November 1989.

Key Dates:

1875:: J.H. Mills opens a small grocery store in Bristol, England.
1900:: J H Mills Ltd. is formed with 12 stores in operation.
1950:: Tyndall, a Bristol-based finance house, gains majority control of the company and changes its name and the name of the supermarkets to Gateway.
1964:: Frank Dee purchases the wholesaler that had been part of J H Mills and then develops the Frank Dee supermarket chain in northern England, which soon has 70 units.
1970:: Associated Food Holdings Ltd. acquires the Frank Dee chain.
1974:: Associated Food merges with Thomas Linnell & Company Ltd. to form Linfood Holdings Limited.
1977:: Linfood acquires the Gateway chain.
1983:: The Frank Dee units are converted into Gateway outlets; Linfood changes its name to Dee Corporation; the 98-unit Keymarkets chain is acquired.
1984:: The 41-unit Lennons chain and the 380-unit International Stores chain are acquired.
1985:: Company expands into the U.S. market with acquisition of sporting goods retailer Herman’s for $414 million.
1986:: The 419-unit Fine Fare supermarket chain is purchased for £686 million.
1988:: Dee changes its name to Gateway Corporation.
1989:: Gateway is acquired by an investor group under the name Isosceles PLC.
1990:: The first Somerfield store opens; the company introduces the Somerfield line of private-label products.
1993:: Herman’s is divested.
1994:: A major revamp is launched to convert the remaining Gateway stores to Somerfield Stores; Gateway Group is renamed Somerfield Holdings.
1996:: The newly named Somerfield plc gains its independence from Isosceles through a flotation on the London Stock Exchange.
1998:: Somerfield merges with Kwik Save Group plc.
1999:: The company announces plans to sell about 500 stores, refocus the firm on smaller “neighborhood” stores, and convert the Kwik Save stores to the Somerfield banner.
2000:: New management team reverses course, halting store sales and announcing the retention of the Kwik Save chain.

Early and Mid-1990s: The Troubled Isosceles Era

In 1990 the first Somerfield store was opened, with the new format positioned upmarket from Gateway and designed to compete more directly with the stores of rivals J Sainsbury plc, Tesco PLC, and Safeway plc. The more modern Somerfield stores were bright and placed a heavy emphasis on fresh foods. At the same time, the Somerfield line of private-label products was launched. The company launched Food Giant, a downmarket, discount chain, in 1991.

Although the launch of the Somerfield chain would prove to be a key development in the company’s history, the early 1990s were most notable for the financial struggles of Isosceles stemming from the huge debt burden incurred in the 1989 takeover, from a deep and long-lasting recession, and from price wars in the grocery sector. Sales and profits fell, and the company was saved from bankruptcy only through the three separate restructurings of its debt that occurred by early 1994 as well as the laying off of 2,000 workers in 1992. There were also a number of management changes, with Smith departing in September 1991 and being replaced by Bob Willett, and Willett stepping aside a year later. David Simons, who had been finance director of the Storehouse apparel chain, began a longer-lasting stint as chief executive in January 1993.

Around this same time, Isosceles was finally able to unload some of its noncore holdings. In late 1992 the Wellworth chain was sold to Fitzwilton PLC for £122 million. In March 1993 Isosceles sold Herman’s to a U.S. investor group led by Tag-gart/Fasola Group for an undisclosed sum. Simons also moved to center the company around the Somerfield format. In May 1994 the Gateway name began to disappear; a two-year, £200 million refurbishment program was launched to convert the remaining Gateway Foodmarkets into Somerfield Stores, and the Gateway Group, still owned by Isosceles, was renamed Somerfield Holdings. Next, Somerfield gained its independence from Isosceles through a flotation of Somerfield plc on the London Stock Exchange in August 1996. At the time the company was operating about 600 supermarkets. Through a complex series of financial maneuvers, Somerfield emerged as an independent, public company with only about £130 million in debt. Also in 1996 Somerfield began opening gasoline station minimarkets in partnership with Elf Aquitaine SA (later known as Total Fina Elf S.A.).

Late 1990s and Beyond: The Kwik Save Merger and Its Difficult Aftermath

In March 1998 Somerfield merged with Kwik Save Group plc, operator of nearly 900 discount grocery stores located throughout the United Kingdom. Founded in 1959 by Albert Gubay, a Welsh entrepreneur, Kwik Save had opened its first discount supermarket in Colwyn Bay, Wales, in 1965. The company grew over the decades both organically and through acquisitions, maintaining its position as the largest grocery discounter in the United Kingdom. Like Somerfield, Kwik Save concentrated on in-town locations, making for a good fit between the two chains. As Simons envisioned the merger, the combination would yield annual savings of £50 million through the closure of Kwik Save’s head office, the pooling of back-office operations, and the increased clout the company would have with its suppliers. He also foresaw further savings from the conversion of at least some of the Kwik Save outlets to the Somerfield banner. Later in 1998 Somerfield entered discussions with struggling food wholesaler Booker plc regarding a possible takeover, but the talks ended without an agreement. In early 1999 Somerfield entered the home shopping market and began experimenting with a home delivery service.

Integrating the Kwik Save and Somerfield chains proved more difficult than anticipated, and Simons embarked on a major overhaul late in 1999. The company announced that it would sell about 500 stores, including as many as 140 of the larger Somerfield stores and about 350 underperforming Kwik Save outlets, in order to refocus the firm on smaller “neighborhood” stores. Simons also planned to eventually convert the remaining Kwik Save stores to the Somerfield banner. Unfortunately, finding buyers for the stores proved extremely difficult—although 46 larger Somerfield stores were sold in early 2000—and after seeking to take the company private with the backing of private equity firms, Simons was forced out. Alan Smith took over as chief executive in April 2000, having previously served as chief executive of Punch Taverns. Soon after, John von Spreckelsen was named executive chairman. Von Spreckelsen was a turnaround specialist who had most recently helped reverse the fortunes of Budgens plc, operator of convenience stores, as that firm’s chief executive. The new leadership team retained Simons’s emphasis on “neighborhood” stores but halted plans to sell any more stores and to eliminate the Kwik Save chain. Needing to concentrate on reviving sales and profits at its core operations, Somerfield also announced in June 2000 that it would halt further development of its home shopping unit.

Von Spreckelsen and Smith emphasized that the situation they had inherited at Somerfield had been so dire that a full recovery could not be expected until 2005. The executives felt that by the end of the fiscal year ending in April 2001 the company had at least been stabilized and was no longer in a death spiral. The operating loss for that year was £6.3 million, compared to £79.5 million for the previous year. For the first six months of the 2001/2002 fiscal year Somerfield was back in the black, posting an operating profit of £5.6 million. The company was beginning to see dividends from its commitment to an expensive multiyear program of store renovation in which a certain number of Somerfield and Kwik Save outlets were upgraded each year. Same-store sales growth appeared to have returned to both chains by the Christmas selling season of 2001. Other important initiatives in the attempted restructuring included the opening of a new flagship store in Kingswood (a suburb of Bristol) featuring high-quality fresh foods and ready-to-eat meals, the launch of a new high-end private label line called So Good, and the introduction of the company’s first loyalty card, the Saver Card. Somerfield’s recovery was by no means a certainty given the highly competitive and volatile nature of the food retailing market, but the company appeared to have a solid strategy for surviving and thriving.