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The City: Christmas and competition

Published:  18 January, 2007

It's a clich to say that it's tough on the high street; just look at the household names that have issued profits warnings over the past few weeks. They range from WH Smith to Philip Green, despite his paying himself a 1bn-plus dividend. Yet, despite reports of house-price inflation taking off again, the Bank of England cut interest rates in August because of fragile consumer spending, and there are even predictions that the general state of the economy is so bad that hopes of staving off a dismal Christmas have been all but abandoned. Note how the London market slipped by 10% in October (but has since rebounded) because of the fears that high energy prices will provoke greater reluctance to open wallets and purses.

Nevertheless, the actual volume of consumer spending is increasing on an annualised basis; but because it was the consumer who kept the economy expanding despite

the stock-market slump from 2000 to 2003, alarm bells sound when the tills stop ringing quite so loudly. Spending is rising,

but margins on each item are shrinking as costs increase, hence the profits warnings.

And if the retailers are under pressure, what about their suppliers? The first inclination of any chain feeling the squeeze is to demand lower wholesale terms. There's more of that to come, especially from the supermarket groups, which are past masters of the tactic.

Tesco and Asda continue to pound away at those lower down the league table, but Sainsbury's most recent trading statement pointed to that store stopping the rot. And while Morrisons is still struggling to get to grips with Safeway, it too is beginning to stabilise. So, the last thing either of them needs is a revitalised fifth force. But that is what they are about to get, if the promises from the new owners of Somerfield (which encompasses Kwik Save) are to be taken at face value.

After a seven-month cliffhanger, Somerfield has finally accepted a 1.1bn takeover from a consortium of property tycoon Robert Tchenguiz, private-equity firm Apax Partners, and banks Barclays Capital and Kaupthing. While not as high as some had hoped, the 197p-per-share deal represents a 300% rise on the Somerfield share price in 2000. And the new owners have pledged to spend 300m within two years on accelerating a store-refurbishment programme and improving the range. Tchenguiz says the existing management got the strategy right but more money will be thrown at it. 'We are competing with the big boys,' he said.

Competition is a wonderful thing; your view of it, however, depends who is contributing to the fighting fund.