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McColl's wholesale supplier deal casts doubt on Nisa sale

McColl's Retail Group plc, which operates convenience stores across the United Kingdom, reached a wholesale supply agreement with Wm Morrison Supermarkets PLC in a deal that could cast doubt on the possible acquisition by J Sainsbury Plc of one of its current suppliers, Nisa Retail Ltd.

The agreement, announced Aug. 1, will see Morrisons supply Safeway products and national brands to 1,300 McColl's convenience shops and 350 newsagents in a phased program beginning in January 2018. It will replace all McColl's existing supply arrangements in time; the company's current suppliers include Nisa and Palmer & Harvey.

The deal "throws doubt on NISA's takeover talks with Sainsbury," retail analyst Nick Bubb wrote in an Aug. 1 research note. "It is a big blow to the struggling Palmer & Harvey and NISA, as they lose the supply contracts."

However, a person familiar with the matter said: "Sainsbury's proposal was not conditional on Nisa retaining the McColl's contract." A spokeswoman for Sainsbury declined to comment.

Nisa generates about one-third of its annual revenue from its supply contract with McColl's. Nisa's sales in 2016 totaled £1.31 billion. The loss of the supplier arrangement with McColl's could deter Sainsbury's interest in finalizing a £130 million offer for Nisa, according to a report in the Daily Telegraph newspaper on July 24, which cited industry sources.

Britain's supermarkets are looking for ways to stay competitive as discount chains ALDI Einkauf GmbH & Co. oHG and Lidl Stiftung & Co. KG make deeper inroads into the U.K. grocery market. Tesco Plc, the U.K.'s largest grocer by revenue, is trying to buy Booker Group Plc, a wholesaler and operator of convenience stores.

McColl's said in its statement that the deal with Morrisons will advance its fresh food credentials, improve its commercial terms and simplify its operations as it migrates to a single wholesale partner for the entire estate.

"In McColl's, Morrisons gain a long-term partner of significant scale with a growing neighbourhood convenience estate and in Morrisons we gain access to their best-in-class sourcing and manufacturing capabilities," McColl's CEO Jonathan Miller said it a statement.

McColl's will be given exclusive access to Safeway products for a year. Morrisons has been developing a new Safeway range since the end of 2016. It comprises over 400 fresh, frozen and shelf-stable foods, many of which are made in Morrisons food manufacturing sites. Morrisons acquired U.K. retailer Safeway in 2004 and phased out the brand in 2005.

Under the terms of the agreement, Morrisons said in a statement that it expects total annualized wholesale sales, including tobacco products, to all of its partners to be in excess of £700 million by the end of 2018. "We expect this new initiative to make an initial profit contribution in 2018/19, and increase thereafter," it said.

"This new partnership is a further example of Morrisons leveraging existing assets to access the UK's growing convenience food market in a capital light way," said CEO David Potts. "Wholesale supply will help make us a broader, stronger business."