Was the merge between Safeway and Morrisons successful?

University Degree Business and Administrative studies

Amy Harmon-Smith

Module 3

Bournemouth School for Girls

I am investigating the merging of the two companies Safeway PLC and Wm Morrison Supermarkets PLC, and looking at the problems and successes that have arisen from it. From this, a balance of situations can be clearly seen and concluded whether the take over of Safeway’s by Morrisons was overall a success.

What is Merging?

Merging is a form of in-organic growth and integration of two companies into one larger company. This action is often voluntary and involves either stock swap or cash payment. Usually mergers occur in a friendly setting where executives from the respective companies participate in a process (where one company wants harm to be avoided to another) to ensure a successful combination of all parts. This is the common factor of difference between merging and acquisitions: acquisitions happen through a by the majority of outstanding shares of the company being bought on the stock market and therefore are involuntary.

There are four types of merging:

Vertical (Backwards and Forwards): This is where a firm integrates with a firm that is in either the previous or next (respectively) stage of the production process. E.g. Backwards Merging is where a firm in the secondary sector buys one in the primary.
Horizontal: This is where a firm buys another firm in the same production process and industry, e.g. secondary producing product A buys secondary producing product A too.
Lateral: Is very similar to horizontal merging. It is where a firm buys another firm in the same production process, but the products are related and not the same, e.g. Cadbury’s merging with Schweppes.
Conglomerate: This is where a firm buys another that it is usually in the same production process but the goods are unrelated. This is to achieve diversification and spread risk. E.g. Unilever owns such companies as Calvin Klein, Birds Eye, Flora, Domestos, Cif, Dove, Walls, Vaseline and Ben & Jerry’s. Most of these are in different industries attracting different consumers.

However horizontal is the only type of takeover in the merging of Morrisons and Safeway and relevant here.

What was Safeway?

Safeway was founded in 1962 and owned by , later sold to Argyll Stores in 1986. It specialized in Fresh readily available food and boasted its high quality of customer service with the slogan “the friendliest store in town”. After it managed to recover from its unprofitable years in the early 1990’s it became the fourth largest retail supermarket. However in 2000 it was not growing as fast as its competitors and had a £91.4 million profit less down from 1999.

What is Morrisons?

Morrisons was founded in 1899 by William Morrison and has always stayed in his family. It has a total of 355 stores in the U.K. (including those of Safeway). It is the fourth supermarket retailer in the U.K., behind Asda, Tesco and Sainsbury’s. Morrison’s main strategies are based on doing the basics efficiently, selling predominantly food at low prices, putting all their concentration into the food sector and not expanding into non-food services like Tesco and Sainsbury’s have (e.g. loans, insurance, clothes etc). Secondly unlike any other supermarket they do not contract out any of their work: they are completely dependent upon themselves and all their packaging and producing is entirely in house. Thirdly they are environmentally and socially conscious: they strongly support all recycling, making it their objective to increase the amount of recycled products collected by 7% each year. Additionally, they adopt a charity every year and help them raise money.

The Takeover

In January 2003, Safeway made its concerns public and announced that it needed a buyer. Only a few bidders seemed appropriate including Tesco, Asda, Sainsbury, Philip Green (owner of ) and Morrisons. Tesco, Asda and Sainsbury’s bids were refused by the competition commission as to prevent a strong monopoly position happening. This is where a company owns 25% or more of the market share which can be very domineering and cause damage to other competitors and prevent a healthy economy of that industry. Philip Green backed out which left Morrisons to lead the bidding. On the ...

This is a preview of the whole essay

The Takeover

However, on order of the Competition Commission, Morrisons had to sell off (originally 52) 50 Safeway stores. These were bought by John Lewis, Sainsbury’s and Tesco. This increased Morrison’s market share to 13.4% and stores to 355 (with Safeway Compact disposal).

This takeover is a typical example of a horizontal merger as both Morrisons and Safeway are in the secondary sector and sell identical products under different brands. But why did they decide to merge? A recent report (2000) showed that in surveys the reason for mergers and takeovers were:

35% to gain new geographical markets
20% to maximize shareholder value
19% to protect market share
8% to acquire new products
7% to gain control over supply

Out of these options, I think the main reason Morrisons decided to merge was to gain new geographical markets. Morrisons was largely concentrated in the English and the north of with no stores being much further south than this. Safeway stores were largely based south of this extending from Cornwall to Kent so seemed like a perfect match to widen Morrisons target market. (See below)

Secondly, buying Safeway’s will have protected Morrisons against competition. Safeway’s were a much bigger company than Morrisons and always prevented them from taking fourth place in the market share of supermarket retail. Not only this, but increasing their size so much has made a larger size gap between them and Waitrose (fifth), Iceland (sixth) reducing chances that they can overtake them.

The Successes that have arisen from the Merger

Economies of Sale: Morrisons have always produced and packaged most products “in house” unlike any other supermarket, which has made them very efficient. Therefore after merging, 1200 Safeway staff that did not work in-store had to be made redundant which saved a huge amount on fixed costs. This is because Morrisons had much better established and more efficient work manufacturing procedures than Safeway and managed to still have an increasing supply with only a few extra staff (in proportion to previous numbers). They improved the relationship with the supplier of the raw materials who were able to improve the deals.

Location: As stated above, this is one of Morrison’s biggest reasons for merging, originally being concentrated in the midlands and north of the UK. Consumers in the South now have the opportunity to shop at Morrisons which have increased the spread of geographical location and more opportunity to sell to consumers of a higher demographic group to raise average spend.

Renovation: All of their bought Safeway stores have had to be renovated which has consisted of new technology (tills), new fascia, new paint etc which offers a fresh new look to many stores across the UK. This has not only improved image, but improved the average spend in the new shops (up 20% than other original Safeway stores.)

More Potential: Now that Morrisons have increased in size and have the additional help and skills from the directors at Safeway, they have more potential to go further, providing they keep profit margins increased and steady. They can target at many more consumers and implement new original products which are not always food based.

Oligopoly: This is when 4 firms dominate market share between them making it very difficult for other firms to enter. Now that Morrisons has increased in size, there is a much more concentrated oligopoly competition set up making it much harder for any other firm which reduces competition

The Failures that have arisen from the Merger

Redundancy: Even though saving money was the initial idea when making 1200 people redundant, the redundancy fees were very expensive to Morrisons (£17.6m). It is also very bad for unemployment levels making so many people redundant at once and did not earn the newly formed company a good reputation.

Account Problems: The newly formed company did not get off to a very good start when they faced major publicized account problems. It emerged that Safeway had changed its accounting system just three weeks before the takeover and inflated its books by taking early bonus payments from suppliers and therefore creating a deficit (the amount by which expenditure exceeds budget) in excess of £180 million when the Morrisons accounting system was applied.

Failures to raise average spend: Even though customer numbers have improved dramatically, the average spend has not. In unconverted Safeway stores especially, they have an average spend 20% below that of converted stores, (£4.06 less) and overall, the average spend has fallen by 6.26% than last financial year. (See below)

Unconverted stores lost: As described above, the unconverted stores were making a loss. This is due to the fact that Safeway now has a tired, washed out image being public knowledge that it is not “Safeway” anymore. Consumers will prefer to shop at a fresh, good image store that has clearly recently been renovated.

Cost of renovation: All Safeway stores had to have their fascias removed and replaced with a Morrison’s one. This took a total of 20 months and £4.2million to complete with the last Safeway being re opened on the 25th November 2005. Even though this was expensive, it had to be done otherwise half of their stores would be making a loss.

Wrong Format: In late 2004 it was announced that the 114 smaller 'Safeway Compact' stores were to be sold off to in a deal worth in total of £260.2 million. This is because Morrisons is suited to the “Market Street” format which is better suited to larger stores and could not be integrated into Safeway Compacts. However for Somerfield, who are known for their smaller outlets, this has helped them tremendously to increase their size and geographically spread.

Feeding the competition: When Morrisons was ordered to sell 52 Safeway stores, they were snapped up by Tesco, Sainsbury, Waitrose and Asda. The ones sold to Tesco and Waitrose have shown to double their sales. Additionally the other stores have done well by improving sales by up to 70%. This has fed Morrisons competition and has obviously not helped them.

Operational and Culture Differences: Much more money has been invested in applying Morrison’s operational techniques to delivery, customer care and stocking etc. This is to achieve the high efficiency Morrisons has always acquired to save in the long run. Additionally, more capital has had to be invested into training the staff into the desired culture of the Morrisons policy.

Lacking of Competitive Advantage: Now that Morrisons is a much larger company, it cannot rely on their slogan of “Real Value Every Day” and “serving best quality at the lowest possible prices”, as this is already being relied upon twice with Tesco and Asda. Especially in this industry, firms need to provide consumers differentiation because price leadership is already used heavily and cannot go any further. Morrisons will not be able to reach quite such low prices as Tesco/Asda because they cannot achieve the economies of sale as much as they do. Therefore the lacking of strategy has been illustrated by their profit warnings of falling to £50million.

Conclusion:

Why Have Morrisons made a loss?

I think the main reasons Morrisons made a 560% profit loss to £63million was for a few reasons:

Firstly, it seems as if the takeover was not thoroughly planned ahead and communication was poor. The company had a problem with the accounting system which with more communication to the then executives of Safeway would have easily been solved. Also, Redundancy was always a prospective issue, but the exact numbers were not planned correctly however because three months later, Morrisons announced they were looking for five million staff hours for that financial year. This caused unnecessary capital loss and a bad reputation.

Secondly, renovation was not speeded up enough. It took the chain 20 months to complete the renovation and in that time unconverted stores were causing loss. This should have been speeded up as to not cause permanent damage to reputation and accounts.

And thirdly, their reputation and image is now confused. Now that they are a bigger company, they need a very clear strategy that is not already used by its competitors. People prefer to go to Tesco, Asda and Sainsbury’s because they are familiar to the environment. With so many changes to design and culture of the new Morrisons, it is a change to what consumers are used to, especially with the unconverted Safeway stores, consumers knew that is didn’t “exist” anymore and psychologically, this is not preferable.

Morrisons: The Future

Overall, the merger has not been entirely successful. With twice as many examples of failures as there were successes above, it portrays the situation that the issues did not balance. This is due to the fact that Morrisons made a substantial loss and still has not fully recovered. It seems that they have taken on a project too big – (seeing as Safeway’s was twice the size of Morrison’s) and something that is not right for them. Perhaps it would have been better suited to a firm similar layouts and reputation as Safeway to minimize takeover and renovation cost e.g. Iceland. However Morrisons went through and have succeeded but have not been successful. But what should be next for the store?

A lot of damage has been done to the reputation: confusing strategies, redundancy, lack of respect for their financial community and are not getting a strong message across to anyone. Ideally, they need to work hard on their marketing campaigns as it seems to be very discrete. All their competitors advertise on television primarily whilst in 2006 no effective advertising campaign has been launched by Morrisons.

Secondly, having no non food products or services available is not a good strategy, as stated in Morrisons 2005 report. They state that they prefer to concentrate on delivering high quality, fresh food goods at low prices. This is also already available at Tesco, Asda and to some extent (at a higher price) in Sainsbury’s too. However the difference is is that the competitor’s offer clothes ranges, loans, insurance home and electrical items as well.

Lastly, Morrisons are very environmentally/charity supporting and friendly and should not only do more to make this a stronger achievement, but publicize it more. They have a clear potential advantage but nothing is being done to contribute that any further.

With a mixture of adjustments, and as their reports state “stringent financial control”, Morrisons should be able to pull through their difficult and challenging few years. However they are going to need renovation themselves, externally and internally. Even though the takeover was not the best action they could achieve to enlarge the firm, they have come through it well and have the future potential to build themselves back up and raise their market share to the maximum.