Rumours that Waitrose is eyeing food chain Eat has analysts wondering what is in it for the retailer. Carolyn Wilson looks at the menu of options

What does a £4.5bn grocery giant want with a £75.5m chain of upmarket sandwich shops? This is the question analysts are debating in the wake of suggestions that Waitrose has an appetite for Eat.

Speculation is rife that Waitrose wants to swallow the sandwich chain and expand its portfolio of stores, while simultaneously closing in on its target of doubling its current 4% market share to 8% by 2020. But the plan appears fraught with complexities, raising question marks over how successful such a manoeuvre would be.

Growing through acquisition would be a major diversion from the retailer’s recent organic growth and partnership-based strategy.

Only this week, for example, under a Boots tie-up announced last year, Waitrose lunchtime food products were launched in four Boots stores, with a roll out to 700 stores planned if it is successful. Under the deal, seven Waitrose stores will stock Boots beauty brands initially. Other partnerships include a licensing agreement with Duchy Originals, a joint venture with Welcome Break on motorway services and a buying alliance with Booths.

So, while a tie-up with an upmarket sandwich shop works on one level, surely a concessionary partnership rather than an outright purchase would make better commercial sense?

Just last month managing director Mark Price commented on the success of both partnerships in an exclusive interview with The Grocer, identifying them as key “opportunities to grow floor space with partners”.

Based on the success of these tie-ups, and the organic growth Waitrose has engineered (full-year results showed a 3.6% rise in like-for-like sales), acquiring Eat seems a little leftfield for the forward-thinking Price, suggest analysts.

“The Boots and Duchy deals make sense,” says one. “Both are in the same upper socio-demographic as Waitrose. But Eat? It’s nowhere near as high up the ABC scale. I’m intrigued what the bigger strategy must be.”

The unanimous assessment of analysts is that an acquisition doesn’t stack up financially if all Price wants is a fast route to food-to-go. They insist other plans must be afoot.

“Eat is reasonably successful so it makes sense for Waitrose to keep the brand proposition alive and build on its reputation. If a concession was all that was planned, Price would just do a partnership deal,” speculated a leading City analyst this week.

The analyst identifies Eat’s figures as evidence of “good-will” foundations upon which Waitrose could accelerate plans for its 300-strong c-store estate. While Eat’s like-for-like sales fell 3% to year-end June 2009, this was better than the 4% average decline in the casual dining sector, and the chain increased sales by 11% on the previous year to £75.5m. Eat now trades out of 100 shops and attracts 450,000 customers a week.

Waitrose umbrella
“Look at the Duchy deal,” says the analyst. “This is another distinct brand proposition by Price. He’ll keep Eat alive underneath the Waitrose umbrella and use it as part of his development into smaller formats.”

The prognosis is stretched further by CACI associate partner Nicky Christie, who suggests Price could be considering transplanting the Waitrose concept into existing Eat outlets.

“Look at the demographic fit Eat presents for Waitrose. What a great way for the retailer to enlarge its presence in cities,” argues Christie. “The existing Eat outlets already target people Waitrose wants to attract; the worker and the resident.”

Crucially, an acquisition would also enable the retailer to expand its geographic spread as many of the Eat sites are in parts of the country where Waitrose currently doesn’t have a presence. Eat has four shops in Manchester, four in Birmingham and two in Scotland outlets that would kick-start Price’s plans to increase its presence further north.

Bricks and mortar
“Buying Eat would give Price bricks and mortar as well as an established brand,” says Christie. “The leasehold is an opportunity to leapfrog the retailer into a c-store estate. I can picture 100 outlets of Eat@Waitrose doing very well.”

But this raises the question of how suitable the Eat sites are when it comes to accommodating a Waitrose c-store model. When Price announced plans to open 300 smaller formats 10 this year and 30 every year thereafter people envisaged a Waitrose version of M&S Simply Food.

However, Livingstone partner Patrick Groarke questions whether the average Eat outlet (at approximately 1,500 sq ft) would be adequate for the purpose Price has in mind.

“The acquisition doesn’t seem to be the most obvious way for Waitrose to increase its footprint. The size of the store would surely limit product range,” he says.

Of course, the retailer’s reasons for snapping up Eat could be less grandiose than an aggressive UK-wide roll-out of Waitrose c-stores.

Selling Eat products alongside the Waitrose range with outlets that are perhaps open later in the evening would allow the retailer to get a firm foothold in the lucrative food-to-go market.

“If this is the case, I expect Price will start with the 100 or so Eat stores, letting people get used to the idea of the partnership and then continue to roll them out,” says Groarke.

Financial carrot
While this speculation sounds positive there is a major sticking point; are Eat’s owners willing to sell, particularly after one of the founders recently praised the progress of the chain?

“Like-for-like sales were disappointing relative to budget. However, in the circumstances of the year [it was] a commendable result,” director Niall MacArthur claimed in a review of Eat’s end-of-year accounts. He also revealed plans to grow the company from 100 shops to 200 over the next three to five years “without any significant change to its opening strategy”.

For MacArthur’s name to be linked with a possible sale, one source speculates that Waitrose must be dangling a pretty juicy financial carrot.

“Eat did better than the overall casual dining sector last year. So why would [co-owners] Faith and Niall MacArthur want to sell now?” says the source.

So, does Waitrose have the stomach to pull it off? With Price in such dynamic form, perhaps the better question is, if it does, will it be left with a bad case of indigestion?

Eat: the facts Sales: Like-for-likes declined 3% in year-end June 2009, compared with the 4% fall in the overall casual dining sector. Total sales increased 11% year-on-year to £75.5m.
Growth: Eat has 100 shops 78 in London attracting 450,000 customers a week. It opened eight sites in 2009 and 15 in 2008. Staff grew from 1,493 to 1,512 in that period.
Expansion: Directors plan to grow the company from 100 shops to 200 over the next three to five years “without any significant change to its opening strategy”.

Read more
Waitrose eyes £100m sandwich maker Eat (29 March 2010)
Waitrose whirlwind plans to double sales by 2020. How? (13 March 2010)
Waitrose set to try out several Boots formats (12 December 2009)