Why Britain’s grocers are so weak And foreign investors spot a bargain opportunity in our supermarket shares, claims ALEX BRUMMER

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  • Established Grocers Weak Because of Lidl and Aldis Discounters
  • As they established a foothold in the UK, country supermarkets had to fight back on price
  • This fight has taken a terrible toll on margins and profits – they have had to run to stay on the spot.
  • While weak boards and fund managers saw a problem, private equity saw an opportunity.
  • Dice-loaded by short-sighted executives, weak boards and lazy investors who care more about waking agendas than running muscle ventures

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The private equity ownership of supermarket chain Morrisons, an employer of 110,000 people, will come a step closer this week.

Preferred suitor Clayton Dubilier & Rice (CD&R) is required to submit its formal offer to shareholders by September 25.

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SoftBank-backed conglomerate Fortress could still come back with a higher offer, or another buyer could emerge. But a sure result is that the Bradford-based grocer will lose his independence.

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In March: The gates were opened and private equity vandals swarmed

How has this happened? The blame can largely be placed on the board headed by Andy Higginson, and without a vision of tall shareholders seeing what financially driven disruptors have in their minds.

The government, in the form of Trade Secretary Quasi Quarteng, has seen no reason to intervene. The Competition and Markets Authority expressed concern about the volatility that could arise from debtor takeovers but lacked the powers to stack it.

Morrisons and other grocers are vulnerable because they are rated so low on the FTSE. Asda has gone into private equity hands, Jay Sainsbury is faltering and Tesco, foolishly selling off its interests in the booming Far East, now looks like just another elite utility grocery.

Established grocers are weak because of Lidl and Aldi discounters. As they established a foothold in the UK, country supermarkets had to fight back on price.

This fight has taken a toll on margins and profits. They have to run to be on the spot. But while weak boards and fund managers saw a problem, private equity saw an opportunity. Property can be brought in from right under the nose of the owners at rock bottom prices. These are still bargain-basements, even after the bidding war.

What CD&R sees is that after the recent expansion, German discounters are nearing the saturation point in the UK.

Suitable sites are few and very expensive. Instead of pouring resources into the UK, discounters are starting operations as far away as Australia. They’re headed for zero as Tesco ends global expansion.

Tastes are changing here in the UK. Food prices are always important and consumers do not want to take it lightly. The real trend is for a better quality product.

That’s why Morrisons is such a steal with its own cheese, fish and butchers that make British products at great prices. Quality and healthy food is becoming more important. The CD&R consortium has grasped the wrong-headed narrative and has seen a different proposal.

Of course all the usual private equity trickery will be put to use.

Some easy money will be raised from the sale and lease-back of the freehold. Cloud kings Investing in off-the-shelf technology from the likes of Salesforce.com can cut costs and reduce staffing.

But the real prize may be Morrison’s combination, in some way, with Motor Fuel Group (MFG), controlled by CD&R and with 900 outlets. The game plan will be to convert the forecourt into electric charging stations – this has already started – and to set up Morrisons convenience stores along with coffee shop facilities at the sites.

Nobody wants to see Britain’s booming supermarket sector run by outsiders.

But the dice have been loaded against grocers by myopic executives, weak boards and lazy investors, who care more about the ESG agenda than running muscular ventures.

They opened the gates and there was an influx of barbarians.

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