Safeway slumps on profits warning

Safeway, the supermarket group which abandoned a pounds 9bn merger with Asda in September, suffered a setback yesterday with a shock profits warning caused by poor sales growth and low product availability. Nigel Cope, City Correspondent, reports on a new victim in the supermarket battle.

Safeway shares lost 16 per cent of their value on the warning as the company said full-year profits were likely to below those of last year. Management blamed weak sales growth, with same-store sales up by just 0.5 per cent, as well as low product availability and the loss of top- up shoppers to rivals such as Tesco and Sainsbury's. Safeway admitted it had concentrated too much on attracting high-spending family customers without targeting sufficient ranges at other groups.

The company denied it had sought the Asda merger because of the weak performance of its own business but said it did not intend to restart talks because the regulatory hurdles were likely to prove insurmountable. "I don't see any circumstances under which discussions could be reopened," said Safeway's chief executive, Colin Smith.

As the shares crashed 64p to 330p, analysts said Safeway faced a long haul to improve its performance. "Safeway has been exposed for what it is - Britain's fourth-best superstore operator," said Andrew Fowler of UBS. Frank Davidson, of HSBC James Capel, said Safeway would find it hard to stimulate its sales because of its weaker brand and a more compromised store portfolio which featured too few large, out-of- town stores.

Another analyst said Safeway would find it much harder than Sainsbury's to engineer a revival: "The difference is that Sainsbury's was a historically very good business that just had a couple of bad years."

Mr Smith admitted the company might have taken its eye of the basics of retailing.

The profits warning came as Safeway announced flat first-half profits of pounds 228m. Like-for- like sales increased by just 2.8 per cent on last year.

Investment column, page 27