OFT could clear Asda's Somerfield swoop

Asda, owned by global retail giant Wal-Mart, has reportedly appointed investment bank Lazard to advise it on launching a potential bid for Somerfield, the UK's fifth biggest food retailer.

Somerfield has already received offers from Icelandic retailer Baugur, which has now formed a consortium that includes Barclay's and property mogul Robert Tchenguiz to improve its bid, and another consortium led by London & Regional.

Even so, the arrival of Asda-Wal-Mart on the scene would be hard to ignore and the firm's interest in Somerfield, if assumed to be genuine, could herald its first venture into Britain's convenience food retail market.

Wal-Mart, now cited as the world's biggest company, has tended to avoid the convenience sector in favour of larger hypermarkets in its various retail markets. But, planning restrictions introduced and tightened by successive UK governments have prevented the firm from beating down competition with its usual format.

And, the firm is keen to chase down Tesco - the undisputed market leader which recently became the first UK supermarket to break the £2 billion profit barrier.

Tesco has already become the first of the major multiples to seriously expand into the convenience sector by building compact Tesco Express stores in town centres as well as acquiring the TNS and Administore convenience chains, including One Stop, Nite and Day and Cullens.

Somerfield could put Asda right into the thick of the convenience retail game, a market that analysts say has strong growth prospects. The UK has the largest sales of food and drink sales through convenience stores in Europe, with a value of almost £13 billion in 2003, according to market research group Datamonitor.​

Somerfield has almost 1,300 stores, more than any other multiple retailer, and has moved towards convenience retailing after failing to compete adequately with leading multiples in the big store arena.

Speculation in the British press this week suggested a deal between Asda and Somerfield could be heavily investigated and ultimately shot down by UK competition authorities. These authorities disqualified Sainsbury's, Tesco and Asda from the bidding war for Safeway in 2003, fearful of the resultant market concentration.

But, the Office of Fair Trading said it made a distinction between convenience stores, slightly bigger top-up shops and larger one-stop superstores. "Convenience shops cannot constrain a one-stop shop,"​ a spokesperson said, meaning a crucial factor for Asda would be how the OFT defined Somerfield's stores.

Either way, Asda may still avoid trouble. A combined market share of one-stop sales with Somerfield would come close to, but likely stay under, the 25 per cent benchmark classically seen as constituting a monopoly.

"It may well be something the OFT would look at, but it is quite possible that it would get through,"​ said Peter Willis, competition lawyer at Taylor Wessing.

"If the OFT thinks it has enough information and it is presented fairly then it's possible they may not send it to the Competition Commission. It will be borderline, they [Asda and Somerfield] would have to do a really good job,"​ he said.

Tesco has so far survived unscathed despite controlling around 30 per cent of the UK grocery retail market and recent reports claiming British food shoppers spend £1 in every £8 in its stores.

The problem may come if the OFT decides to review its definition of food retail sectors and how they compete with each other.

Willis was sceptical about the prospect of changes to the OFT's retail competition strategy in the near future. "They've just had a good look at that fairly recently,"​ he said.

The fragmented nature of Britain's convenience food retail sector means Asda would also be unlikely to meet serious challenges there.

Somerfield, despite its many stores, has little more than a three per cent market share and the leading retailer in the sector, the Co-op, only controls around 5.5 per cent.

Even if Asda was barred from a wholesale takeover of Somerfield, it could still gain a tidy share of Somerfield's stores by joining up with the firms that have already placed offers.

Asda declined to comment on the Somerfield issue, saying reports were still only speculative.