Planning laws and Competition Commission restrictions have also put a stop to them driving growth by simply embarking on an aggressive store opening programme and buying up the competition.
Jacques César, head of the retail and consumer division at Mercer Management Consulting, which works with many of the UK’s largest food companies, explains: “The stock markets want growth and in the past retailers could add a few more stores to achieve this, but it’s not happening any more because of the OFT, store saturation and planning consent. The retail sector lost its shine as the technology bubble took hold in the mid to late 1990s and it has not returned.”
The theory is that a high share price allows companies to borrow money, but to get this they need to be a high growth firm, but for this high growth they need investment, and a high share price to borrow against...it’s a bit of a Catch-22 situation.
The Grocer’s portfolio of shares, which we tracked in the magazine last year, demonstrates the City’s attitude towards food retailers. While the FTSE 100 dropped more than 20% in the 12 months, our portfolio of big food retailers and manufacturers fell by just 7.64%. But despite most of the shares - including Morrisons and Tesco - holding steady or faring better than average, they were still labelled defensive stocks and do not set the financial world alight.
So what exactly can companies do to get their share prices on an upward trajectory again? Darren Shirley, food retail analyst at ING, has one solution. “The major retailers have had to find growth by drilling deeper into different formats, such as convenience.”
Convenience is recognised as one of the fastest growing sectors in food and this has led to some consolidation. Among the major deals struck recently were the £232m purchase of Budgens by Irish retailer Musgraves, the Co-op taking over troubled Alldays and Tesco’s £377m deal for the T&S Stores business.
However, Iain McDonald, head of research at Numis, believes that beyond convenience there are few consolidation opportunities. “Apart from convenience there is not a lot left. It is one of the few areas offering strong growth.” And according to another senior food retail analyst, even the T&S deal can only provide limited new growth to an operator the size of Tesco.
Opportunities to delist are limited
“At its best it is a nice little earner and at its worst it is a distraction. It’s an irrelevance to Tesco really - it’s like a flea on the backside of an elephant,” he says. It is also difficult for retailers to achieve high growth rates through international consolidation. César points to Ahold, which has made great strides throughout Europe to grow its stores base, only to see the stock markets batter its share price.
Opportunities for food retailers to de-list with the help of venture capitalists are limited. Despite their falling valuations many are too large for a buyout and the remainder of the smaller players, such as Iceland and Somerfield, have little appeal - despite the fact that Icelandic retailer Baugur recently acquired a stake in both.
One senior analyst says: “VCs would have to be extremely brave to take on Iceland or Somerfield.” One problem would be how to exit from such a deal. To re-float either business would be difficult because it would only be accepted back on the stock market as a zero-growth business, he says. A trade sale would also be difficult because there have been no takers for either of them up to now.
Steve Gotham, senior retail analyst at Verdict Research, says that even an attempt at breaking up the businesses and selling off parcels of stores is not without problems. “It would be a gamble because you’d be a forced seller. I think a VC would need to have a growth strategy that went beyond asset-stripping and I don’t know what that would be. There are no quick fixes for these businesses.”
However, it is not all doom and gloom, for food retailers are still regarded as a haven for risk-averse investors because of the regular couple of percentage points of growth achieved each year by more successful operators.
Among these is Morrisons, which is probably the only stock that the City still retains any form of love affair with. Among the fans is Shirley at ING, who says: “Physically, it is immature so there are plenty of areas where it is under-represented. Its vertical integration is also a distinguishing factor, which enables it to maintain quality and gain the manufacturing margin. It’s a potent format that means it can stick to its knitting and just roll out stores.”
Although Tesco is another of the analysts’ favoured stocks, it will need to use more innovation than Morrisons to achieve high levels of growth, says Geoff Webb, chief executive of the Webb Partnership. His company was instrumental in the creation of the Unilever Corporate Ventures Group that has $200m to invest in food-related start-ups.
Webb believes that the large food retailers have the opportunity to break out of the low-growth straitjacket by partnering with branded manufacturing businesses outside their core offer. This would allow them to expand their ranges into new categories. “If they are agile then they will find that they can build new revenue streams and the analysts will possibly see the company as a growth business again,” he says.While he applauds Tesco for its T&S deal, he says he would have preferred it to find new revenue streams without buying any assets. “Although Tesco used the right logic with T&S we’d have first said, why are you not doing holidays? And you’ve not got a big enough choice of hi-fis? The supermarkets need to be a bigger part of a consumer’s life and bring in lifestyle brands.”
So, there are opportunities for growth for quoted food companies if they employ more innovation. Meanwhile the City will continue to pummel the share price of any company that fails to deliver on any promise - however innovative they may be.