Interesting assertion

The future for both Morrisons and Asda is particularly bleak after both succumbed to debt-fuelled takeovers during the pandemic. Stretching a company’s balance sheet with high-cost debt rarely makes it more competitive despite the claims of private equity cheerleaders but this is a wretched time to be doing it to a supermarket.

Probably wrong too. Or at least wrong in one way.

Specifically high cost debt probably doesn’t do much, no. We might talk about concentrating minds and all that but really, no, that’s a side issue in increasing margins, reducing costs and so on.

The whole process though? Turfing out the incumbent management, taking a knife to the pleasant and settled ways of middle managers? That can work wonders. That move of British Gas into the private sector wiped out what was it, five levels of management?

If that high cost debt is the method by which the other process is achieved then yes, it can indeed work.

7 thoughts on “Interesting assertion”

  1. The buyers of both Morrison and Asda have precisely fuck all intent of making the businesses more efficient and competitive.

    CD&R bought Morrisons in order to exploit its real estate portfolio. They’ll sell stores where there is redevelopment potential and bundle the rest into a sale-and-leaseback deal. They’ve taken on £6.6bn of bank debt and of £1.3bn of structured financing (at 11.5%) from private credit funds. The size and cost of the debt is not just (or even) significant because it adds risk, but because it signals their intent to squeeze the last penny out of Morrisons as quickly as possible.

    The Issas have similarly leveraged Asda right up the wazoo, including with £840m of junk bonds and structured finance, again to keep their equity to a minimum. They will acquire Asda’s petrol stations themselves and sell its £3.5bn of freehold property.

    I suspect in both cases, the property portfolio is historically undervalued by both the supermarkets and the stock market. At no point will the interests of customers be given the slightest consideration. I’m sure they will sack a few people though, no fun otherwise. The final act will be to divest the gutted retail business themselves, probably for a song.

  2. In the retail sector, this is a very bad move. Margins are tight and the operation already has to be very efficient ( apart from Sainsburys).
    This sale and lease back idea for the properties is always a disaster. Look at Karstadt in Germany.

    One thing positive, though. Morrisons have reintroduced plastic carrier bags.

  3. We’ve warmed to Morrisons in the last couple of years. Wouldn’t do without their croissants, wonky avocados, and salad bags. Whatever their faults they are in a different universe of competence compared to any government-owned outfit.

  4. Tim, you have such touching faith in the desire of PE firms to improve the efficiency of their acquired businesses. Most of them couldn’t sell £10 notes for a fiver.

    They are in the financial engineering business; working from a highly priviledged tax position.


  5. I suspect that any cost savings will be achieved on the backs of common employees not the highly paid comfortable middle management, and customers will have to get used to worse service, oh and suppliers especially family companies and the like without massive international brand clout will also get the squeeze.

    Don’t share your optimism.

  6. Tim – British Telecom, not British Gas: the latter was one of the more efficient/least inefficient companies in the public sector because some of their bosses were well aware that a badly-run gas business leads to deaths by explosion and lots of bad publicity.
    National Power sacked about one-third of its workforce in the run-up to/following privatisation. Under Wilson they had paid three people for every two unionised jobs.

  7. MC, the land should be freed up for more economic uses if it can. It’s not as if we need physical supermarkets anymore more now that you can use an App to get up to 20 items delivered by a surly youth on a bicycle (it’s the future).

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