Morrisons Takeover Safeway

Business studies:

Has Morrison's takeover of Safeway's been a success?

In 2004, supermarket chain Morrison's completed the takeover of rivals Safeway for around Ð'Ј3bn, acquiring Safeway's stores, brand and product. (Appendix 2)

In this essay I'm going to discuss the reasons behind the takeover and how successful it has been. I chose this particular takeover because it was the biggest in British retail, hitting headlines and causing a bidding war between Tesco, Asda, Sainsbury's and Morrison's, the top supermarket chains.

Reasons:

The first reason for the takeover was inorganic growth. By acquiring Safeway's stores, Morrison's could expand in size, and also expand geographically. Morrison's was largely based in the midlands, while Safeway was based in Scotland and the south-east, this takeover meant Morrison's could enter into the areas. They now operated nearly 400 stores over the UK. This in turn increases the size of their supply chain, the movement of goods from supplier to the customers. Morrison's suppliers now have to cope with a larger demand over an expanding area.

In March 2006, Morrison's announced that sales were up 3.2%. However, the rate of momentum increased when sales rose 3.7%. (Evidence, see appendix 1, Trading Performance) This shows the growth meant sales increased. Included in the growth is the vertical integration of gaining Safeway customers.

Although the growth has meant an increase in sales, it came at a cost. Morrison's had to pay nearly Ð'Ј3bn and take out a loan of Ð'Ј1.9bn. This is an opportunity cost, as Morrison's could have spent the money improving there current stores, or invested the money, earning interest on it.

Although it cost them a great amount, Morrison's have seen an increase in sales, which is predicted to rise still. (See appendix one, the future) I think that they made the right decision, and have automatically moved them up to 4th spot in market share. They sold of some stores generating capital to pay-off loans; still they have managed to challenge the big 3.

Secondly, the takeover means reduced competition and greater market share. The new market share is 16.1% which is the same as Sainsbury's. Morrison's can now compete with Asda and Sainsbury's, especially with the threat from Safeway being non-existent.

The spectrum of competition is oligopoly-market, with now 4 firm's competing in the market, essentially having overall control between them. Although Tesco has a market share of 27%, technically they have a monopoly. But now the other 3 are competing for 2nd place. (See appendix 3, supermarkets' market shares)

For Morrison's, reducing the competition is good because they have a greater control, and larger market share, but it is bad for the consumer, as they have less choice, and if the big 4 get too much control prices can start to rise. So what is good for Morrison's is not always good for others including customers. On the other hand is could start a price war between the main players in the market, as each tries to increase sales.

I think, looking at the perspective of Morrison's, this is a big move in being able to compete with the leading chains, and increasing the market share will help its sales, and satisfy the shareholders. But other stakeholders such as consumers may have less choice, but Morrison's is renowned for their low prices and deals on simple groceries. But despite this Tesco are still bigger.

The third major reason for the takeover in my view is economies of scale. Morrison's can now benefit more from purchasing, (buying in bulk) and financial power. For example, banks are more willing to loan money to bigger companies at a lower rate. Also managerial; Morrison's have acquired the Safeway staff, so they do not to spend extra money of training etc. Also a revenue synergy which refers to the opportunity of a combined corporate entity to generate more revenue than its two predecessor standalone companies would be able to generate.

Another advantage of this is risk bearing. Morrison's have an established business to fall back one, so if it all goes wrong they can sell off property and go back to their original stores. The economies of scale can have an effect on marketing as well, being able to advertise more of their products. Essentially it helps them to reduce their unit cost per item.

Another gain is cost synergy which refers to the opportunity of a combined corporate entity to reduce or eliminate expenses associated with running a business. Cost synergies are realized by eliminating positions that are viewed as duplicate within the takeover.

Lower average unit cost should mean that in turn Morrison's can increase their profit. And this relates to the above paragraph, where they can become more powerful. The other side of this is the damage to local farmers and producers, who may now have even less say in the prices they get for their produce. This can have a damaging effect on smaller, more local business, pushing out the locally produce and importing more. (See appendix 4, economies of scale, where the main effects are summed up)