What would Sir Ken think? Article by Clive Black, Advisor

February 2, 2017 12:07 pm
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2016 was a tumultuous year, and likely one that will feature in the school history books of our grandchildren’s generation. Time will tell whether it will be a threshold year for good or evil.

In the big world of geopolitics, 2017 has started with a bang; first off the blocks was Trump’s inauguration followed by a plethora of executive orders, the outcome of which is yet to be seen. The British Prime Minister Theresa May has had a busy January too, not least announcing that the UK will be leaving the Single Market and possibly the Customs Union.

In the world of British grocery retailing, the pace of change has been no less frenetic. That said, the most significant news for myself, personally, was the loss of the grocery retail colossus Sir Ken Morrison who passed away at the age of 85. Sir Ken was a great retailer and a great man of Yorkshire, the sort of person that one stops for a moment to think about.

I look back at his career and legacy with admiration and awe, starting as he did by grading the freshness of eggs on Bradford market; Sir Ken proved beyond doubt that capability is a key business skill and it can surmount many other traits, including that of scale. The British business community, the food industry, and the retail trade are all a little poorer without Sir Ken.

Whilst Sir Ken was all about skill, guile, graft and craft, another development in the breakneck pace of the British food market is the proposed merger between the UK’s No.1 grocer and the UK’s No.1 wholesaler. The sense of surprise is palpable; we didn’t see this coming. The proposition’s key implications are, from a positive perspective, the fusion of two great leaders in Dave Lewis and Charles Wilson.

The proposed merger is curious as it helps develop Tesco’s management depth and deleverages the indebted business; a rights issue by the back door could be tagged to it. It also brings the possibility of considerable synergies. £200m has been stipulated initially, which we deem to be a wholly conservative figure. Such synergies would be derived from the gradual fusion of their respective supply chains, thus creating a mix of winners and losers amongst the British and wider production industries.

Whilst this is all so, we await the enunciations of the British Competition & Markets Authority (CMA), an organisation that has the potential to make the European Commission appear heavenly with respect to efficiency, consistency and rationality. Quite what the CMA makes of this deal remains to be seen, but it may, through its over-engineering of local competition policy, have created a rod for its own back.

Postcode analysis is at the heart of the CMA’s work. With over 9,000 overlapping stores between Tesco and the Booker fascia’s, the organisation could be truly overloaded to the point of dysfunctionality if the investigation goes to phase II. The outcome from such an analysis is unbeknown. On the other hand, should the CMA clear the proposed deal without an in-depth analysis (buying into Tesco-Booker’s view that the latter does not own the stores it supplies, just the fascia’s) then we can also foresee potential mayhem with possible legal and even political challenge.

So, what a start to the year. There is much water to flow under the bridge on the Tesco-Booker deal with considerable supply chain implications so watch this space. I wonder what the great Sir Ken would make of these developments? Rest in peace Sir Ken.

Dr. Clive Black is Head of Research of Shore Capital Markets and an Advisor to Coriolis.