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Systems integration could be key to Safeway buyout

As prospective buyers for supermarket chain Safeway emerge almost daily, industry experts warn that integrating their IT systems is an issue they ignore at their peril. Daniel Thomas reports

As the takeover battle for Safeway intensified last week, IT professionals warned that the success of any prospective merger could depend on effective integration of the two companies' computer systems.

With Asda owner Wal-Mart and Sainsbury both now considering counter-bids for the UK's fourth largest supermarket, in an attempt to scupper the agreed £2.9bn offer from Morrisons, speculation over the future of Safeway's IT systems has intensified too.

US venture capital firm Kohlberg Kravis Roberts also confirmed its interest in the retailer and said it was considering making an offer. Market leader Tesco, meanwhile, was reported to be considering an offer for some of Safeway's smaller stores, in a bid to prevent its main rivals gaining any market share.

Most supermarkets today rely heavily on IT systems to keep supply-chain and purchasing costs to a minimum so they can maintain low prices without hitting profits.

Lack of awareness about the implications of mergers and acquisitions for these systems can have a serious impact on the success of any project, warned IT industry expert Colin Beveridge, who oversaw several mergers during his time as an interim IT director.

"Companies usually have serious cost-saving ambitions, but these can be seriously undermined by disparate infrastructure and systems," he said. "I have seen prospective mergers totally abandoned because of system problems."

So which of the three main bidders is best placed to integrate its IT systems into Safeway's infrastructure?

According to Tony Savage, senior consultant at retail analyst firm RMDP, the fact that Morrisons has not traditionally spent heavily on IT could work in its favour because it will find it relatively easy to integrate Safeway's existing IT projects.

"Morrisons has always focused on extending the life of its systems, but I have no doubt that it will take advantage of some of Safeway's initiatives," he said. "For example, the self-scanning system that Safeway introduced has been particularly successful and should not be too hard to integrate."

However, the overall integration between the two supermarkets' IT systems will be more complex, Savage warned.

"Both companies run IBM in the back office but the point-of-sale terminals are different so this may take some time," he said. "I expect they would run the two separate IT systems together for at least a year."

Jacqui Hendriks, research director at analyst firm GartnerG2, agreed that acquiring Safeway would allow Morrisons to broaden its use of IT.

"Morrisons is not known for deploying new technology in its stores or supply-chain operations, and in time this would have been a serious inhibitor to growth," she said. "Safeway, on the other hand, has built smart customer fulfilment systems for ordering, transport, distribution and supplier management."

Change management strategy, often the key success factor in takeovers, will be especially important if Morrisons' bid is successful, Hendriks said.

"Safeway is a mature retail chain, with experience of a number of mergers and rebranding exercises," she said. "However, Morrisons has become a major retailer remarkably quickly and has little experience of absorbing new cultures on this scale."

Asda Wal-Mart, on the other hand, is well versed in mergers and acquisitions and has one of the most advanced IT systems in the world, meaning integration would not be too much of a problem, Savage said.

Crucially, he added, both Asda and Safeway run IBM-based retail systems. "They run identical versions of IBM's Supermarket Application version 2. Integration would be straightforward as the data and messaging formats are identical."

The sheer size of Wal-Mart's IT operation gives it an advantage as it has influence over suppliers such as IBM, Savage said. "It has worked in tandem with IBM to produce its own Java-based messaging system, for example."

Wal-Mart's 1999 purchase of Asda has already demonstrated the US retail giant's expertise in integrating IT systems. Analysts at Deutsche Bank last year estimated that the merged group would save £150m a year when Wal-Mart's IT systems were fully integrated with Asda's systems.

Sainsbury, Savage said, would find it more difficult to integrate its IT systems with those of Safeway, as it operates different retail systems to the rival supermarket.

"Sainsbury still runs the ICL ISS/400 solution and it is also trialling new systems from NCR," he said. "In the end, however, it will come down to how easy it is for them to handle different message formats."

The battle for Safeway is likely to be a long, drawn-out affair with, seemingly, new developments on potential bidders emerging every day. IT departments from the supermarkets in the running will be watching closely, because the possibility of a lengthy integration project could represent a chance for them to shine.

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