First Asda, then Morrisons, now Sainsbury’s?
COVID-19 Market Update – 24/08/2021
6 minutes to read
This is the 50th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note focusses on two key issues:
- What we learned from the ONS figures for July
- Updates on takeover bids for Morrison’s and possibly Sainsbury’s
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- Retail sales values +3.6% y-o-y in July
- Lower than the +6.4% suggested by the BRC
- Monthly declines largely seasonal (and irrelevant)
- Food sales +1.5% y-o-y, limited uplift from Euros
- Non-food sales +8.7% y-o-y
- Strong clothing (+18.5%) and footwear (+28.5%) sales
- Online sales decline y-o-y by -3.2%
- Monthly growth of +0.3% distorts penetration levels to 27.9%
- Online grocery declines -1.3% y-o-y
- Online non-food down -2.8% y-o-y
- Online pure-plays down -4.1% y-o-y
- CD&R ups bid for Morrison’s
- Morrison’s changes recommended bid to CD&R
- Apollo reportedly waiting in the wings, possibly for Sainsbury’s.
1. What we learned from the ONS retail sales figures for July
An unedifying release and frankly baffling set of numbers from the ONS that don’t really stand up to much scrutiny. But the usual obsession with meaningless month-on-month trends meant that significant inconsistencies in the actual data were not widely picked up.
The month-on-month trends inevitably showed a decline. Retail sales values (exc fuel) in July were down -2.6% on June, while volumes (exc fuel) declined -2.4% (inc fuel: vals -2.3%, vols -2.5%). Cue the usual outcry of retail sales growth evaporating and the general economic recovery grinding to a halt. All of which overlooks the plain fact retail is seasonal and we always tend to spend less in July than we do in June.
The figures to actually major on (as ever) were the year-on-year ones, which showed that values (exc fuel) were up +3.6% and volumes were ahead by +1.8%. Not quite the doomsday scenario that many interpreted the release as. A clear (but inevitable) deceleration on previous months, but a fairly decent performance given the comp from last year was a not insignificant +3.5%, reflecting a full month of non-lockdown.
Food sales grew a respectable +1.5% y-o-y, but more attention was given to the -1.5% decline in m-o-m volumes. The ONS attributing this to Euro 2020 is frankly laughable. The tournament spanned both months, with the group stages in June, the knockout stages largely in July. The ludicrous implication being that food sales spiked in June, but we all lost interest by the time England progressed all the way to the final. If there is any correlation at all (I remain to be convinced there is), surely the trend would have been the other way round?
Non-food remained firmly in growth territory at +8.5% y-o-y, albeit against a soft comp of -6.5%. By extension, the categories that reported the strongest growth in July were largely those that were significantly in negative territory in July 2020 e.g. clothing +18.5% (-23.6%), footwear +28.5% (-34.0%), jewellery +21.3% (-18.6%), sports goods +7.9% (-5.0%) and not forgetting perennial star performer / total laggard music & video +121.6% (-30.9%).
There was some inevitable slowing in demand for some household categories, notably electricals -0.2% (+12.8%) and carpets -20.0% (-0.2%). DIY (+8.6%) and garden centres (+6.2%) continued to enjoy strong growth despite increasingly challenging comps (+11.4% and +9.5%). Growth in furniture (+18.3%) is actually accelerating.
Most of the data quirks are in the online numbers, largely by dint of m-o-m movements rather than year-on-year ones. All online retailing increased by +0.3% month-on-month in July, although only food and department stores were in positive m-o-m growth territory. On this basis, online penetration arrested some of the steep declines of the previous months and increased to 27.9%.
Y-o-y analytics tell a very different, but more credible, story. All online retail witnessed a y-o-y decline of -3.2% in July, with online grocery down -1.3%, non-food down -2.8% and non-store (i.e, online pure-play) down -4.1%. Online declining by -3.2% in an overall retail market growing by +3.6% would suggest a more representative figure for online penetration of ca. 26%.
Data quirks and red herrings aside, it is difficult to read too much into the latest figures from the ONS. The pace of growth is decelerating, but consumers are still spending. Perhaps the figures were a marginal disappointment given the early steer we had from the BRC (+6.4%). Maybe the weather was the decisive factor? It’s been a long time since the weather has been mentioned in retail sales analysis, perhaps we’re closer to a return to normality than we think?
2. Updates on takeover bids for Morrison’s and possibly Sainsbury’s
The takeover battle for Morrison’s rumbles on, as we thought it might. In the latest development, Morrison’s board has switched allegiance and is now recommending a £7bn offer from private equity giant Clayton, Dubilier & Rice (CD&R). CD&R was the original bidder for the business, although their initial bid of ca. £5.5bn was rejected on the basis that it significantly undervalued the business.
CD&R have now trumped the £6.7bn rival bid from Fortress, which was originally recommended by Morrison’s. The grocer said on Thursday evening that CD&R had tabled an improved offer valuing it at 285p per share.
Morrison’s chair Andrew Higginson said the increased offer from CD&R “represents good value for shareholders while at the same time protecting the fundamental character of Morrison’s for all stakeholders”. CD&R, whose current investments include Motor Fuel Group, which operates 918 fuel forecourts in the UK, has committed to retain Morrison’' existing management team led by CEO David Potts and said material store sale and leaseback transactions are not planned.
CD&R is advised by former Tesco chief executive Sir Terry Leahy, but his potential involvement post takeover is far from transparent. He has been vocal in the bidding process (“the grocery sector in the UK is undergoing great change and we believe Morrisons is well placed, with CD&R’s support, to succeed in this environment”) but whether that translates to a hands-on senior management role post-deal is a very moot point.
As it stands, the deal is expected to become effective in October. In the meantime, Fortress said it is considering its options. The private equity firm urged Morrison’s shareholders to “take no action” to the improved CD&R bid and said a further announcement would be made in due course. Further rumblings cannot be ruled out…
And, two suitors may soon become three, according to The Sunday Times at least. New York-based private equity house Apollo is also reportedly weighing its options with regard to joining Fortress’ in bidding for Morrison’s. Apparently, having lost out in the bidding process for Asda, Apollo is desperate to acquire another major UK grocer.
Apparently, this also brings Sainsbury’s into the fray. But Apollo’s interest in Sainsbury’s is thought to be purely exploratory at this stage and should it join Fortress in bidding for Morrison’s, that is likely preclude any standalone bid for Sainsbury’s.
Apollo has over $88bn under management and last year invested $1.75bn in US chain Albertsons, which owns Safeway. It reportedly sees opportunities in Sainsbury’s presence in wealthier parts of the UK and scope to improve efficiency by shrinking stores and adding automation facilities to handle online orders.
Watch this space. And if anyone’s got £20bn burning a hole in their pocket, Tesco might be in play too…
Stephen Springham
Partner – Head of Retail Research
+44 20 7861 1236
stephen.springham@knightfrank.com