Identify
In 2005, Apax Partners partnered with specialist
property investor R20 and Barclays Capital to buy Somerfield, the
UK's fifth largest grocery retailer.
At the time of purchase, Somerfield was a LSE listed company
with significant operational challenges, positioned as a distant
fifth in the UK grocery market, significantly behind the 'Big 4'
supermarkets (Tesco, Asda, Sainsbury's and Morrison) and with a
loss making subsidiary, Kwik Save, which was absorbing a
disproportionate amount of time and attention. Nonetheless, the
Apax Retail & Consumer team saw in it the kernel of a good
business.
In particular Modern Convenience retail had been identified by
the Apax team as a growing sub-sector of the grocery market: the
increase in the length of the average working day, more women
working and increasing demand for fresh and healthy ready meals,
had led to a shift in buying habits towards more top-up/convenience
grocery shopping, and this trend was set to continue. Within this
market segment, consumers perceived Somerfield to be a strong
format and it operated a large, well located store estate to serve
this market in the UK, with significant potential for further
development.
Support
Apax's role was to add its considerable experience
across investing in retail businesses to our two consortium
partners, whose strengths lay in property and
financing.
From the start, the Apax team's vision for Somerfield was that
its focus should be the convenience store market, focusing away
from a strategy as a weaker competitor in the large supermarket
sector.
Apax then used its extensive retail network to bring in John
Lovering as Chairman and Paul Mason as Chief Executive to lead the
change at Somerfield, as well as recruiting a number of very strong
executive board managers from the market leading players to drive
this vision.
The management team did an excellent job to enable this complex
repositioning.
Consumer focused
The transition for Somerfield to focus on convenience involved not
just a significant cultural shift but a greater business focus on
the needs of a customer with a different shopping mission. The
convenience customer tends to buy a smaller basket, but on a more
frequent basis (several times a week). Instead of catering for the
large 'weekly shop', modern convenience formats focus on fresh
fruit/vegetables, prepared meals to eat that evening, top-up items
such as milk or bread and household/personal care items in
convenient pack sizes.
In practical terms, this meant significantly simplifying the
breadth of product range, smaller packet sizes, range innovation
and improving the fresh food offer through changes to supply chain
and logistics. In addition, changes to store operations and
in-store experience were made to ensure the best customer
experience at the peak times (e.g. end of the day for the
after-work shopper).
Store improvement
The overall aim was to focus the organisation on operating
attractive, modern convenience stores in the right locations,
increasing customer numbers/visits, and customer satisfaction.
During the period of Apax's investment, new stores were opened and
existing ones refitted, new marketing was developed and the price,
range and availability of fresh produce and own-brand ranges in the
Somerfield stores were very significantly improved to enhance the
appeal to customers.
Realise
The under-performing Kwik Save business was sold almost
immediately following acquisition by the Apax consortium and,
during the period of ownership, some of Somerfield's large owned
supermarket sites were selectively sold to the 'Big 4'
grocers.
These disposals, alongside strong operating cash generation from
the restructured business, enabled the consortium to reduce
Somerfield's debt by almost half. This left a focused retailer with
a large, well operated modern convenience store estate that would
clearly be an attractive acquisition to one of the other large food
retailing players in the UK.
In March 2009, following a number of approaches, Funds advised
by Apax Partners and our consortium partners agreed the sale of
Somerfield to the Co-operative Group for £1.565bn.
The Co-op is a large, mutually-owned supermarket group with a
strong responsible business ethic. In Somerfield it has acquired a
company with a rejuvenated brand, a loyal customer base and a
focused store portfolio. Convenience shopping is a fast-growing
segment of the grocery sector and Somerfield is well positioned to
continue its growth path under the Co-op's ownership.