Analysis: Why has B&M swooped on Heron Foods?

B&M has been the subject of much speculation this summer. The retailer made headlines last week when rumours circled that Asda was set to buy the business, while many in the City expected B&M to add a new international player to its basket.

However, B&M has confounded expectations and picked up a bargain much closer to home in the form of Heron Foods.

The frozen food specialist has a 251-strong UK store estate across the Midlands and North – but with B&M’s deep pockets and boss Simon Arora’s lofty growth ambitions, this number could skyrocket before too long.

Retail Week Prospect analyst Philip Wiggenraad says: “There has actually been very limited growth in Heron Foods’ store network over the last five years and B&M sees potential to expand the format beyond its North and Midlands heartland.

“B&M of course has first-hand experience in transforming itself from a regional player into one with a nationwide presence.”

The scale of B&M and Heron Foods’ businesses are distinctly different. The average size of a B&M store is nearly ten times the size of a Heron Foods.

Common customers

However, the two businesses have common customers in the value end of the market.

Canaccord Genuity analyst Sanjay Vidyarthi says: “B&M think Heron Foods is disruptive because they’re not necessarily in the same towns as a Tesco or Sainsbury’s convenience store.

“The areas they are in will have a very loyal customer as a result, which they can take advantage of by pricing very competitively.”

Wiggenraad agrees that the two businesses’ value-led offers and Northern roots make this a canny acquistion by B&M.

Culturally, the two retailers seem a good fit, he says.

“Both formats focus on having a limited range, which helps concentrate their buying power, and are obsessed with keeping their costs in check,” he says.

Negotiating competitive prices with suppliers is one of B&M’s core strengths. It already sells ambient food and alcohol and Heron Foods could benefit from its buying expertise in these areas.

“This acquisition could see Heron Foods become more focused on providing a discounted offering across a customer’s whole grocery shop, rather than just specialising in frozen and chilled,” says Planet Retail’s global research director Rob Gregory.

Likewise, the acquisition is expected to bolster B&M’s frozen and chilled food offer across its 537-strong UK store estate.

However, will the two retailer’s do a wider bricks-and-mortar tie-up, like the Pep&Co shop-in-shops in Poundland stores?

Wiggenraad has his doubts.

“I don’t think they’ll launch Heron Foods-branded food concessions in stores as B&M has already established itself as a credible source for groceries and as a regional player Heron Foods lacks brand recognition,” he says.

B&M’s convenience ambitions

Snapping up Heron Foods is a clear statement of intent by B&M about its ambitions in the discount convenience grocery market.

“Heron Foods has grown from a standing start and B&M are masters in their field, but general merchandise is very different to the grocery sector”

Clive Black, Shore Capital

Discounters Aldi and Lidl have expressed interest in the convenience format in the past and, along with online, it is one of the fastest-growing sectors across retail. 

However, Shore Capital head of research Clive Black says that B&M should proceed with caution if it is eyeing a full assault on the convenience market.

“Heron Foods has grown from a standing start and B&M are masters in their field, but general merchandise is very different to the grocery sector and they’re up against guys that know an awful lot,” he says.

There’s no doubt that B&M has lofty ambitions and the capital to realise them, and the Heron acquisition could see it soar ahead of its value rivals.