Britain's Supermarkets Don't Want to Be Supermarkets

(Bloomberg Gadfly) -- These days, nobody wants to be a British supermarket.

Tesco Plc, the U.K.'s biggest grocer, is buying wholesaler Booker Plc, while J Sainsbury Plc last year snapped up catalog retailer Argos.

As for Wm Morrison Supermarkets Plc, it is building its own wholesale business using the manufacturing facilities that already make about half of its fresh foods.

The only one of the big four not to participate in the latest round of supermarket diversification is Wal-Mart Stores Inc.'s Asda.

A look at the slices of the market controlled by the top British grocers explains the urge to diversify. The U.K. arms of Aldi and Lidl are taking ever larger shares.

The thinking goes: British supermarkets can either sit there and do nothing, and see the German discounters take more of their customers, or fight back.

And by developing non-grocery arms, the hope is that they can help reinvigorate the core of the chains, or at least, diversify revenue.

Not only will Booker provide Tesco with an entrée into the fast-growing catering market through its supply of pubs and restaurants, the combined group's bigger buying power should help it put cheaper products on its shelves.

There's a similar motivation at Morrison. Making more quiches or processing more fish means economies of scale that can be passed on to customers through lower prices.

For Sainsbury, the rationale is slightly different. If it can encourage consumers to visit Argos concessions in its stores -- usefully filling up excess space, too -- then they may pick up some food while they are there. It seems to be working, as it recently reported a 1-2 percent uplift in grocery sales in stores with an Argos insert.

There are still reasons for thinking the identity crisis has further to go. For example, wholesaler Palmer & Harvey is up for sale, according to Sky News, and could be a target if any other grocer wanted to ape the Tesco/Booker deal.

Sainsbury could well give this a look, given that it is exploring supplying its products to third party store operators under a franchise model, and is already a big P&H customer. But a big strike against this might be that it is busy integrating Argos. 

What about Asda? It has been the worst performer of the big four recently, though it did enjoy its first sales growth for two-and-a-half years in the three months to April, according to Kantar Worlpanel. 

But the question is where it goes from here, and actually it looks like its options to diversify are limited. It was an early mover into clothing and home furnishings so it has enough exposure there. It bought Netto seven years ago to develop smaller locations, but it never cracked the format, so it has little reason to want to look at a convenience store supplier.

And anyway, it is questionable whether Walmart would want to invest in any sizeable U.K. deals right now, when it is busy defending itself in its home market against both Amazon and the German discounters. And it may have missed the boat anyway, as the small store market is rapidly maturing.  

As Gadfly has argued, Walmart should cut Asda loose. It might hesitate, fearful that it would be selling at the bottom. There's also the thorny question of who might buy: a private equity consortium is probably the only viable option.

But the longer Asda drifts, the more likely Walmart will be to take radical action. Then, it really might not want to be a British supermarket either. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

To contact the author of this story: Andrea Felsted in London at afelsted@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.