As the Top 50 independents mark a solid year, MBOs are increasingly in vogue, with Iceland’s Malcolm Walker setting the pace as he looks to take control

It takes guts to stand on your own two feet among the powerful goliaths of grocery retail. Yet it seems more retailers are doing so, eschewing private equity in favour of private ownership.

The most high-profile recent example, of course, is a giant in its own right. CEO Malcolm Walker increased his stake in the frozen food retailer Iceland from 23% to 43% earlier this month following a drawn-out and very public MBO. And he’s in no doubt over the benefits this new-found independence will bring in the long term.

“I am the largest shareholder and the management have board control, so the management really do control the business,” says Walker. “The bank had to sell it, so somebody was going to buy it. If it was Morrisons or Asda it would have been broken up. Private equity would have run it in a completely different way and it wouldn’t have been a fun place to work, or the best company in the UK to work for.”

Iceland falls just short of the criteria we use to identify Britain’s Top 50 independents (only companies more than 50%-owned by family or management qualify), but with its sales of £2.3bn, it would easily have qualified as Britain’s biggest independent grocery retailer had Walker been able to buy an extra 7% stake. The remaining 57% is owned equally by Walker’s key investors - Lord Kirkham, South African Investment Group Brait and Dubai-based Landmark Group. (Iceland’s secondary and less well-known frozen food chain, Cooltrader, would also have ranked at number 29, with sales of £47.9m in the year to 26 March 2011.)

But Walker is by no means alone in seeking to break free from his shackles. In what was a solid year for the Top 50, with pre-tax profits growing 28% to £280.2m on sales up 8% to £8.7bn, two Top 50 players - Frozen Value (28) and CTN operator Rippleglen (21) - made moves to kickstart their expansion last year by completing MBOs. In March, Frozen Value, owner of the Jack Fulton and Fulton Foods fascias, bought out private equity house 3i, which had held a stake since 1997. MD Kevin Gunter and FD Karen Rees now own the company outright.

“After 14 years of working with minority private equity involvement, I am delighted we have managed to take the business into 100% private ownership,” Gunter said at the time. “This opens up new opportunities for it to move forward.”

Cut-price kings

Discounters dominate the Top 50. The seven on our list account for half of the Top 50’s turnover and two-thirds of its profits. In fact, take the discounters out of the equation and the Top 50’s profit margins halve to a slim 1.6%.

They’re not having it all their own way though. Wilkinson’s (1) profits, for example, may be bigger than the turnover of the bottom 25 companies on the list, but they fell 6% last year.

Profits were also down at Heron Foods (15), Poundstretcher (a newcomer at 7, thanks to its move into grocery), and Frozen Value (28). The latter two also posted a fall in sales.

The duo will have been encouraged by the continuing growth of discounters in this year’s Top 50, with TJ Morris (3), B&M Retail (4), Farmfoods (5) 99p Stores (10) and Poundstretcher (18%) - not to mention Iceland, of course, and private equity-owned Poundland - all performing strongly, though our no 1, Wilkinson, showed discounters aren’t having it all their own way.

Coming a month after Frozen Value’s MBO, Rippleglen’s tortuous three years of negotiations surely reflect the more challenging conditions for the beleaguered CTN market. Managing director Mike Colley took a 34% share from founder and chairman Harry Medcalf, with the remaining 66% shared out equally between FD Peter Hyett, ops director Christine Beverley, buying director Laraine Jones and property director Tony Hargreave.

Since the MBO, Colley has reorganised the business into three trading divisions - premium CTNs, high street discount stores and home news delivery stores to tailor stores to the right customers. “We must compete better with the discounters on the high street and are overhauling our high street division to meet the challenge,” says Colley.

Being able to act as quickly and decisively as this is a key advantage in independence, says Edwin Booth, chairman of Booths (9). “Independence allows you to remain true to the founder’s original vision and at the same time to react swiftly and unfettered to market conditions,” he says.

Of course, there are downsides to independence, Booth concedes. “Owners do not always optimise business performance and too easily forget what turns their customers on.”

Another challenge is red tape, says Paul Delves, MD of Harry Tuffin (23). “Government bureaucracy and working practice legislation can be difficult to keep up with for independents as trading is usually first priority, but we persevere,” he says. “However, being your own boss and making instant decisions is a massive advantage for independents. It gives us that competitive edge, and you should never be afraid to copy what your friendly multiple’s latest idea is!”

Delves isn’t alone in taking inspiration from the sector’s giants. “All things considered, we were pleased with trading, but we found ourselves giving away more to achieve it,” admits Andrew Faulks, a partner at Stans Superstore (50). “We put our fuel offer on for an extra eight weeks last year, giving away 7p per litre when customers spent £50 in the main store.”

The brutal conditions on Britain’s forecourts (see above) were perhaps the most extreme of any of the six retail sectors represented in our Top 50. But with the exception of discounters, none of the sectors were exactly buoyant. And overall store numbers climbed by just 2%, compared with 11% in 2010, as many operators chose to regroup.

One example is Welsh supermarket chain CK’s Supermarkets (34). “We sold one store and two stores ceased trading due to the increasing difficulty in servicing the outlying stores - it was continually proving a logistic nightmare to keep the stores fully stocked,” says MD Christopher Kiley. “Since the store reduction we’ve been able to maintain or slightly increase our turnover for the full year.”

As so often over recent years, a number of former Top 50 players have disappeared - not least sixth-generation Scottish c-store operator David Sands, which was acquired by The Co-operative Group in January. David Sands had been on The Grocer’s Top 50 since the rankings were first published in 2002. Back then, it ranked at number 47, with just 14 stores and a turnover of £14.5m. By last year, it had risen to number 29, with 29 stores and a turnover of £40m.

In fact just 21 companies remain from the first Top 50. Of the 29 that have fallen by the wayside, 24 were bought out by larger rivals, three fell into administration and two are now too small to qualify. As well as David Sands, Wayne’s Foods and Tates now come under the name of Blakemore Retail (6) following the merger of AF Blakemore and Capper & Co. Mills Group has meanwhile been subsumed into Tesco’s One Stop chain. And off-licence chain Oddbins fell into administration in April, its assets bought by a number of players, including EFB Retail, which is building the business again from scratch.

As for future departures, fixed-price discounter 99p Stores (10) has been at the centre of sale rumours for some time. The business is currently majority owned and run by the Lalani family, which has built it up to a 175-store business with a turnover of £267m in just over 10 years. 99p Stores refuses to comment on the speculation. And rumours continue to circulate concerning interest from The Co-op Group, as well as Morrisons’ stated intent to grow its fledgling c-store estate from just three stores to over 70 by the end of next year.

For many in the Top 50, however, independence is at the heart of what they are. “We are committed to long term, independent ownership,” says Edward Perry, MD of frozen food retailer Cook (46). “For us, independence is not a tactical or strategic decision, it’s a state of mind. It’s just the way we are and the way we are going to stay. It gives us the freedom to do what we think is best for our customers and we reckon it’s a lot more fun like that as well.”

Iceland’s Walker echoes these sentiments. “None of the investors, including the management, are remotely considering an exit, we just want to continue to run and grow the business. We are not going to do anything revolutionary - we will just keep doing more of the same, keep sales growing and keep profits growing.”

Forecourt frenzy

In November, Snax 24 (11) became the UK’s biggest indie forecourt operator when Rontec Investments acquired Total UK’s 800-outlet retail estate.

With only 77 stores before the deal, this is clearly a big deal for the Berkhamsted-based retailer, even though Snax 24 will actually add only 238 sites to its estate (it sold the rest to Shell UK and DCC).

But with oil prices at a record high, fuel volumes down, shoppers filling up less regularly, and deals on fuel being used to drive footfall to multiple stores, this is no place for the feint-hearted.

And with Murco still on the market 18 months after its US owner Murphy Oil put it up for sale, it seems few are prepared to make big plays. Experts predict buyers will look to cherry-pick the best of Murco’s sites, rather than the whole estate. One likely buyer is Top 50 newcomer Petrogas UK (19), which trades under the Applegreen banner and is already well established in Ireland.

“Our plan for 2012 is to grow to 30 sites here in the UK,” says UK head of finance Peter O’Connor. It had 17 stores in 2011 and in January this year acquired a further seven forecourts in the south of England from Shell.

Expansion is also planned at MRH Retail.

“We have a number of stores with untapped potential and I’m looking forward to expanding sales yet further as we continue to develop our network,” says MRH Retail merchandising analyst Jens Bredahl.