City snapshot: CMA inquiry included Aldi and Lidl after Tesco-Booker pressure

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The CMA backtracked amid pressure from Tesco and Booker to take the rise of the discounters into consideration in delivering its verdict on their proposed merger, The Grocer can reveal.

Yesterday the watchdog published more details to explain the rationale behind its provisional decision to allow the merger, despite huge opposition from sectors of the wholesale industry.

It emerged that the competition authorities listened to Tesco and Booker’s call for the discounters to be included in its calculations on the impact of the proposed deal on competition in the market.

 

The CMA had originally left them out of its phase one inquiry, despite their recent huge growth, with Aldi, Lidl and Iceland excluded from the ‘competitor set’.

But the CMA’s provisional findings, released in full this afternoon, said not only had they decided to take the discounters into account, but they approached them to quiz them for evidence on their impact on the convenience sector.

‘[Tesco and Booker] submitted that Tesco’s main competitors are the multiple retailers and discounters, and that stores operated by these retailers exert a much greater competitive constraint on Tesco than do Booker-supplied stores,’ says the document.

‘We asked Aldi, Lidl and Iceland about the extent to which they considered themselves to compete in the convenience segment.

‘One told us that it competes with the independent retailers to a degree, certainly in terms of customer catchment. It said that the product range will differ in certain respects in that independent retailers will likely offer more in terms of general grocery items and the likes of newspapers, magazines and tobacco products, but competition was likely on more generic grocery items such as bread, milk, cheese, and other general household items.

‘Another told us that in areas where it is located close to convenience stores there is an element of competition. However, its operating model as well as the shopping habits of its average costumer are different from that typically observed in convenience retailing.’

The authority did not name the discounters quoted.

A spokeswoman for the CMA added: “We did take into account Aldi and Lidl but this decision is not just based on that factor, it is based on a whole host of reasons in what has been a hugely detailed inquiry into the market. We didn’t do this just as a reaction.”

However, a supermarket source said: “The CMA at phase 1 had certainly excluded Aldi and Lidl from their calculations. Whether it has been through listening to Tesco and Booker, I don’t know, but the retailer had pointed out how unrealistic that was. The CMA does seem to have acted on that as they are now included.”

In August Tesco appealed for the competition authorities to take into account the major threat to supermarkets posed by the success of Aldi, Lidl and other discounters such as Iceland.

As Aldi and Lidl plan to ramp up store openings, Tesco argued the CMA should have taken the growth of the discounters into consideration in its assessment of the market.

“Tesco and Booker were surprised by the finding that the discounters should not be considered as ‘effective competitors’,” said the retailer. “We consider that there is strong evidence (and industry recognition) that Aldi and Lidl (and Iceland, which was also excluded) are effective competitors in the UK retail groceries sector and provide a strong and credible offering across all customer missions, including convenience.”

Tesco had described the emergence of Aldi and Lidl in its evidence as a ‘revolution’, admitting that the launch of Tesco’s Farms brands range, for example, was forced as a direct response to the discounters’ growth.

As well as having a significant impact on large retailers, it said Aldi and Lidl were adapting their offering to compete more directly with players in the convenience segment and that discounters were projected to account for one in every £7 being spent by 2021.

Just days earlier Lidl had overtaken Waitrose as the seventh biggest retailer in Kantar Worldpanel figures and Tesco said retailers across the sector had “experienced significant losses in consumers” at the hands of the discounters.

“This strong competitive pressure has resulted in the multiples significantly changing their offering to consumers. For example, Tesco introduced its Farms brands range in direct response to discounter growth. As well as having a significant impact on large retailers, Aldi and Lidl are also adapting their offering to compete more directly with players in the convenience segment.”

Morning update

Nissin partnership boosts first half performance at Premier Foods

Premier Foods (PFD) has reported a 1.5% boost to first half revenues and an increase in trading profit as its tie-up with Japan’s Nissin Foods helped drive performance.

Group revenue for the 26 weeks ended 30 September 2017 was £353.3m, up increase of 1.5% on the prior period.

That performance was due to a far stronger second quarter, as group revenue increased 6.2% in the quarter year-on-year following weak first quarter trading.

First half branded sales were in line with last year at £295.4m, while non-branded revenue increased by 10.1% to £57.9m. In the second quarter branded revenues were up 5.7% and non branded were up 8.9%.

Premier said sales had been supported in the first half of the year by a combination of benefits from its strategic partnerships with Nissin and Mondelez International.

In the second quarter, 44% of the Group’s revenue growth reflected benefits obtained through these two strategic partnerships, including Batchelors Super Noodle Pots, Soba Noodles via its Nissin tie-up and Cadbury growth in International.

The Grocery business unit reported half-year revenue of £255.0m, up 1.9% on the same period a year ago, with revenues up 9.7% in the second quarter. First half branded revenues grew by 0.9% to £214.7m and non-branded revenue increased by 7.4% to £40.3m.

In the first quarter revenues declined reflecting lower overall market volumes partly due to a warmer June, lower promotional effectiveness particularly in the desserts category and a move to more normalised levels of trade investment in non-retail channels.

However, the second quarter displayed a significantly stronger trajectory with a return to volume and revenue growth in many of Premier’s major brands.

One of the major contributors to Grocery branded revenue growth in the half was from Batchelors, which grew 7.8% in the period and has also increased its category share by nearly two percentage points over the past year.

This was supported significantly by the launch earlier this year of the Batchelors Super Noodles Pot product, which was accelerated by leveraging the supply chain capabilities of Nissin.

Bisto, the Group’s second largest brand by revenue, performed consistently well during the half, delivering volume and revenue growth and also delivering share gains. Oxo volumes and revenue were up significantly in the second quarter following lower category sales in the first quarter. Angel Delight grew by 30% in the period, benefitting from the launch of convenient ready to eat pots.

Premier added that its grocery business has been impacted in recent quarters by changing retailer promotional strategies. However, it has largely annualised the effect of these changes and for some customers have seen the gradual return of multi-buy promotional activities which are generally beneficial to delivering volume growth.

Sweet Treats delivered revenue growth of 0.7% in the first half of the year to £98.3m, with Cadbury cake revenue was marginally ahead of the prior year and reached its highest ever value UK market share of 8.4% in the period, according to IRI. Total Mr Kipling revenue was slightly lower than the prior year, although momentum is building in its margin-enhancing cake on the go range with growth of 55% in the period.

The International business unit continues to perform “very strongly”, with sales up 23% on a constant currency basis and were up 30% in the second quarter. A key part of the business unit’s success to date is due to the growth of Mr Kipling and Cadbury cake in Australia. Building on this, the Group has recently entered the New Zealand market for the first time with a range of Mr Kipling and Cadbury cakes.

Premier reported a half year trading profit of £48.0m, which was in line with the previous year.

Adjusted profit before tax crept up 0.5% to £26.4m during the period, while it posted a statutory profit of £0.3m after a loss of £55.6m in the same period last year.

Group profits were supported by reduced overhead recoveries in some manufacturing sites in the period while it said grocery margins returned to a more normal level in the second quarter as mitigating inflation through retailers had taken “longer than expected”.

Premier has also embarked on a major transformation of its warehousing and distribution operations to consolidate all its logistics operations at one single location in Tamworth, central England.

Premier said it will invest the majority of its consumer marketing spend in the second half of the financial year, focussed on its key trading period in the third quarter.

CEO Gavin Darby commented: “Our Strategic partnerships with Nissin and Mondelez International are working very well, together delivering over 40% of our revenue growth in the second quarter. We completed the signing of the new Mondelez International Global Strategic Partnership in the first half of the year and through our partnership with Nissin, Batchelors is now the fastest growing major brand in our portfolio following the launch this year of convenient pot format products such as Super Noodle Pots.”

“The cost efficiency programme we launched earlier this year is on track to deliver the expected benefits. We completed the issue of a new £210m high yield bond in June and our Net debt was £21m lower than the same point last year; a little ahead of our plans. Overall, we continue to expect the business to make progress in the second half of the year and our expectations for the full year remain unchanged.”

Also this morning, Nestlé (NESN)has decided to change the organization of the infant nutrition business. Effective January 1, 2018, infant nutrition will move from the globally-managed Nestlé Nutrition to a regionally-managed business.

A dedicated strategic business unit will be created to manage core global functions including “science-based innovation, quality management, compliance, and global manufacturing capacity”. A Nutrition business head will be appointed for each of Nestlé’s three zones, to implement the global strategy in local markets.

Nestlé said the new organization will allow Nestlé’s infant nutrition business to deliver accelerated organic growth and realize further efficiency gains. The more agile and efficient structure will enable Nestlé to respond faster to rapidly changing local consumer preferences, evolving regulation, and customer and channel demand for tailor-made solutions.

On the markets this morning, the FTSE 100 has opened down 0.4% at 7,384.7pts.

Premier Foods has bounced back 6% to 38.7p on this morning’s strong second quarter showing.

Other early movers include Real Good Food (RGD), up 4.2% at 25p, Dairy Crest (DCG), up 2.75% to 560.5p and Nichols (NICL), up 1.3% to 1,731.7p.

Booker (BOK) has eased back from yesterday’s gains, dropping 0.9% to 210.1p. Other fallers include CARR’s Group (CARR), down 2.5% to 141.4p, Crawshaw (CRAW) down 1.9% to 12.3p, PureCircle (PURE), down 1.2% to 480p and Stock Spirits (STCK), down 0.9% to 262.5p. 

Yesterday in the City

The Competition and Markets Authority was no expected to block Tesco’s £3.7bn takeover of Booker, but the CMA waiving through the deal with little objection still gave a big boost to shares in the respective grocers.

Tesco (TSCO), which was trading at well over 200p after the announcement of its deal for Booker, jumped 6.2% to 188.1p. Booker moved well above its 205.3p per share offer level after rising 6.75% yesterday to 212p.

Other risers included Greggs (GRG), up 1.7% to 1,337p, SSP Group (SSPG), up 1.2% to 596p and Majestic WINE (WINE), up 3.8% to 370p.

Science in Sport jumped 8% to 77.25p after raising £15m from a placing of shares to help raise brand awareness, drive further sales growth and break into the football market.

Fallers yesterday included Premier Foods ahead of its half year results this morning, dropping 5.2% back to 26.5p.

Other fallers included B&M European Value Retail (BME), down 2.9% to 380.9p, Britvic (BVIC), down 2.75% to 743p, Cranswick (CWK), down 2.7% to 3,020p, Dairy Crest (DCG), down 2% to 545p, TATE & Lyle (TATE), down 1.9% to 696.5p and Ocado Group (OCDO), down 1.8% to 251.1p.

The FTSE 100 ended the flat at 7,414.4pts.