UK's mid-range retailers seen merging to survive

By Rina Chandran

LONDON (Reuters) - Pressure to keep costs low and stay on top of new trends will force mid-range UK retailers to consolidate or close shop, the British Retail Consortium Director-General Kevin Hawkins said.

"Scale economies are even more powerful today than ever before, so we can expect more consolidation and casualties in the mid-priced, mid-range sector in food and non-food," he said at the Reuters Consumer and Retail Summit.

"A lot of businesses have managed to struggle along, albeit on smaller margins, but scale economies, particularly in commodity products, where brand loyalties are particularly weak, are going to distinguish the losers from the gainers," he said.

Big retailers such as Tesco Plc (TSCO.L: Quote, Profile, Research, Stock Buzz), Asda (WMT.N: Quote, Profile, Research, Stock Buzz) and J Sainsbury Plc (SBRY.L: Quote, Profile, Research, Stock Buzz) are able to drive benefits from scale and have more clout with their suppliers.

Small specialty retailers, which serve niche markets and can respond quickly to emerging trends, will also survive, he said.

"The penalties for being behind the game will be a lot tougher now. Those retailers who respond the quickest to trends are going to do well, and those who have strong brand equity also have a better chance of surviving," Hawkins said.

The UK retail space has seen a fair amount of consolidation this year.

France's L'Oreal SA (OREP.PA: Quote, Profile, Research, Stock Buzz) acquired British beauty products chain Body Shop International Plc BOS.L.

HMV (HMV.L: Quote, Profile, Research, Stock Buzz) bought bookseller Ottakar's OKR.L for a cut price to help its own books chain cope with competition from supermarkets and the Internet. And health and beauty products retailer Boots Group Plc BOOT.L and drugs distributor Alliance UniChem AUN.L agreed to merge.

On Thursday, UK fashion chain Mosaic Fashions MOSAIC.IC, listed in Reykjavik, agreed to buy rival Rubicon Retail in a deal worth 353 million pounds ($653 million).

"Some middle-range department stores and some smaller people have gone out of business in the past year, but it hasn't been such a bloodbath as it was expected to be last year," he said, referring to last July's bombings in London, which hit consumer spending.

"Is there a future for UK retailing? Yes, there is a future for strong brands, there is a future for scale economies, and for those who have good sites," he said.