Discounters Aldi and Lidl to make a play for Somerfield?

In my final column for Checkout (RIP) I made some predictions for 2008. One of these was: "Asda will … attempt to buy an existing UK (convenience) chain; Somerfield … maybe? But it will be thwarted by Sainsbury's, which promises to break up the chain and share the outlets with Musgrave, Spar and other traditional convenience retailers."

In early January I thought I might be on to something when Somerfield announced bumper like for like Christmas sales; at 6.7% these were well in excess of its more prestigious competitors and it felt like something was brewing. We didn't have long to wait before we found out what; an official statement that the current owners were to conduct a swift auction of the chain for a price of around £2.5bn.

Of course, all the current players have been touted as being interested, but Asda has emerged as one of the front-runners, along with a rumoured joint-bid between a grocery player and an existing convenience chain. Strange how things work out.

For years, having hundreds of smaller high Street locations was a millstone around the neck of Somerfield management and its previous incarnations Isosceles and Gateway. Then came the convenience revolution, with everyone clamouring to get back on the high street. Now, you thought, their time has come and indeed with Essentials and Market Fresh, moves in the right direction were made. Then the enormity of the problems facing stable-mate Kwik Save hit home and format innovation was abandoned and an opportunity was lost. As a result, the proposed sale comes as no great surprise. Neither does the level of interest it has elicited; how many other chains are there left that can provide 955 stores of sufficient size at one fell swoop?

It is believed Citigroup, which is running the auction, would prefer to sell the chain as a going concern, rather than on a piecemeal basis. However, due to the diversity of the Somerfield estate this may prove tricky and whilst there is likely to be a dominant grocery partner in any bid, this could end up as a massive trading auction amongst all the major players.

Of the big four lead contenders, Tesco might be 'unwise' to throw its hat in for the full estate. In contrast, Asda is a strong possibility, especially as Wal-Mart is debuting its Marketside small format stores in Phoenix this spring. It is known that Bentonville sees the failure to develop a UK convenience offer as part of the reason why it trails Tesco's market share by such a large margin. However, does Asda really have c-store intentions and if so, does it have an off-the-shelf format that it could drop straight into 900 stores?

Sainsbury's may see this as the opportunity it has been waiting for to really step change its convenience business, which has been developing at a fairly pedestrian pace since Local was first unveiled. But again, the number of stores, the mixture of sizes and a demographic incompatibility with some locations might be blocking factors and a joint bid would appear far more attractive.

Morrisons is just turning the corner in its core business and has probably had enough of digesting rivals for the foreseeable future.

Some of the smart money is on a joint Waitrose and Co-op bid, whilst Spar and Musgrave Retail Partners (Budgens) could benefit from a sell off of smaller stores by Sainsbury's or Asda as part of a post sale break up agreement.

The timing of the sale, with rising food prices, a contraction in consumer spending and the whiff of recession in the air, could encourage one of the hard discounters to take the plunge. Shoppers are warming to their offer and the chains are finding premises hard to come by through other means; this could be their opportunity to become a real force for change in the UK market.

So potentially this could be less a battle for Somerfield and more an unprecedented period of co-operation, as each chain picks over the bones of the estate, looking to satisfy their own particular needs, before the battle-lines are re-drawn and the war for shopper loyalty begins again in earnest.

Of course, I could be wrong and Asda buys the whole lot. Either way, with 3.7% market share at stake it will be fascinating to watch this one play out.