Food groups are squaring up with their next generation of stores and, despite protestations that the space race is over, some retailers’ plans suggest there is little let up.
No other retail sector entered the space race with quite the same ferocity and flexibility as the grocers. From out-of-town hypermarkets to drive-thru click-and-collect pods, urban c-stores to the repurposing of pubs and even churches, the big supermarket groups have left no expansion stone unturned.
Many of their strategies have reflected changing consumer habits, and the latest incarnation has been a proliferation of convenience stores over the past two years.
The grocers have always doggedly pursued the strategy of the moment, whether hypermarkets or digital, and right now the convenience sector is having its moment. Industry research body IGD forecasts that the c-store market will grow by 29% between 2012 and 2017, from sales of £33.9bn to £43.6bn.
That has reshaped the space race. Not so long ago the big grocers - especially Tesco - were under fire for
creating land banks and for long-term strategies to build super-sized hypermarkets across the country. These
initiatives were led principally by the ambition to become powerful forces in a variety of non-food lines, from clothing and homewares to consumer electronics.
But the migration of sales to online channels and the recognition that some categories - such as consumer electronics - have become too competitive to maintain margins, has caused a rethink.
The rise of convenience
This is being expressed in a number of ways, notably through a downshift - not only in the rate of new hypermarket development, but in the size of those developments. In Tesco’s case, the biggest stores in the pipeline have come down from more than 100,000 sq ft to about 80,000 sq ft, and the grocer hasn’t stopped there - it is also reapportioning existing excess space. Gyms, coffee shops and restaurants are all planned for Tesco stores.
Growth has been targeted at the c-store formats, in part to exploit the changing shopping habits of consumers eschewing the traditional weekly shop for daily top-ups, and in part to support the grocers’ click-and-collect infrastructure.
Everyone is at it. Tesco and Sainsbury’s are at the forefront of the growth in formats that they first introduced in the 1990s. Marks & Spencer has extended its food presence with Simply Food, now rivalled by the Little Waitrose stores. Morrisons, meanwhile, came to the party late but has made a series of strategic acquisitions in a bid to take its own slice of the pie. Rival Asda bought and converted the Netto chain - largely urban stores but at a hybrid size between supermarkets and c-stores - while Aldi recently opened its first convenience store in the UK. The Co-op continues to expand, opening 100 new stores a year.
Expansion is on the cards for most. Aldi plans to open 50 c-stores this year, Lidl plans to open 35 to 50 new stores in 2013, adding to its existing UK store portfolio of 600, while Waitrose is opening a more modest 10 this year.
Sainsbury’s plans to open 50 Local stores in London and the Southeast by 2014, adding to its 541 stores nationwide, but won’t comment on c-store plans beyond this.
Morrisons has big plans for convenience despite being behind the curve, having snapped up stores from Blockbuster (49), HMV (six) and Jessops (seven) following their administrations. It aims to open 100 stores - rebranded from M Local to Morrisons M Local - by the end of January next year. Morrisons convenience managing director Gordon Mowat moved quickly to acquire the stores, which fit with the company’s strategy to expand in the Southeast and open more convenience stores.
Morrisons says the Blockbuster purchase gives it quick access to a significant number of high street and neighbourhood locations across the country, particularly in the Southeast. In addition, the stores represent the first opportunity for the retailer to test its new 100,000 sq ft distribution centre in Feltham, west London as it starts supplying from dedicated c-store distribution centres - its 12 existing convenience stores have so far been served by larger parent stores.
Mowat says: “These acquisitions give us a kick-start in securing a solid foothold in this key sector. The convenience market is growing as more people shop locally and we want to be in a position to take advantage of this.”
Elsewhere, Waitrose is vying to win shoppers from rival M&S Simply Food and intends to double its store count
in the London market. A galvanised Co-op under new food chief executive Steve Murrells will also aim to win back market share.
Of course the big beast is market leader Tesco Express, which has more than 1,500 stores and has used its first-mover advantage to secure good quality sites in many towns. About 150 convenience stores are still expected to be opened over the coming year, and around 600 are in the pipeline. Most of these will be Tesco Express convenience stores, although this is about 40% fewer than previously planned.
But when setting out Tesco’s strategy at the company’s results meeting in April, chief executive Philip Clarke unveiled the scrapping of town centre developments, store extensions and development projects as well as
distribution centre closures at a cost of £804m. Some 176 sites that would have been turned into superstores will no longer be developed.
Clarke said: “We said again a year ago that we were going to slow down our property, in fact, we were calling an end to the space race here in the UK and we’ve looked at all of the schemes that we have in the UK and we’re pulling out of more than 170 of them.”
Despite this headline grabber, new property initiatives continue to creep through from the major players. Investec analyst Dave McCarthy questions whether the space race has actually been called off at all.
He cites space growth of 1 million sq ft per annum from Sainsbury’s and roughly half that from Morrisons as signs that the dash for floor space continues. “Philip Clarke may have called an end to the space race, but I don’t think they’ve heard him at Sainsbury’s, or indeed Morrisons, the discounters or Waitrose,” he says. “If plans continue, then industry capacity over the next five years will increase by circa 20%, which in a no-growth industry will continue to erode returns.”
Kantar director of retail insights Bryan Roberts adds that, despite the Tesco deceleration, the other three of the big four “will probably continue to open as much space as possible”. While they will not be the super-sized hypermarkets of the past they will be “large enough to house profitable non-food like George at Asda or the Sainsbury’s clothing ranges,” he says.
“The issue is really about repurposing space currently dedicated to low or zero-margin categories. You have to have some sympathy with Tesco, which opened some of its mezzanine space simply because it was so tough to get planning that it tried to maximise the space. But it has a lot of good synergies that should enable it to bring in different partners or subsidiary brands.”
Indeed, despite applying the brakes, Tesco has still pushed ahead with some big projects. Gateshead Trinity Square - a new 100,000 sq ft Tesco in the heart of Gateshead - opened in May, developed by Spenhill, Tesco’s wholly owned residential and mixed-use property business. The £150m development has completely remodelled the town centre, with 45 new retail units, a medical centre, accommodation for nearly 1,000 students, more than 700 underground parking spaces and a new cinema. Similarly, West Bromwich New Square, which opened this month, has delivered a new 473,000 sq ft shopping and leisure destination as one of the largest regeneration projects in the UK, anchored by a 80,000 sq ft Tesco Extra.
Over the next five years Tesco is likely to open new hypermarkets only in areas where the retailer either wants to achieve high net new sales - such as Sunderland Retail Park - or to regenerate an existing store. It will also continue to push ahead with its work to reinvigorate its existing Extra stores.
Watford and Coventry Extras have been singled out as the first two stores to be remodelled to the retailer’s new “destination” Extra format. The stores will relaunch towards the end of the summer and are expected to incorporate a stronger food offer, a tighter core general merchandise range and stronger fashion ranges. There will also be an added service element, provided by recent investments including restaurant Giraffe, Euphorium Bakery and coffee shop Harris + Hoole. In addition, Tesco is in discussions with Sports Direct, which could take space in some of the grocer’s largest stores.
Clarke’s plans to revitalise excess space have included installing gyms, such as at Stockton-on-Tees where a 120,000 sq ft store has been transformed. It now has a trading area of 80,000 sq ft, with the mezzanine repurposed to include a gym, and a children’s play area on the ground floor.
“What will happen is that their function will change and many will have to get smaller,” Tesco chief marketing officer Matt Atkinson says. “What stores are best for are the things you can’t replicate online. Our stores should be the hubs of the communities they serve. That means providing friendly, personal service to those who shop with us and great counters offering genuine retail theatre.”
As for the c-store evolution, Roberts expects the grocers to get better at convenience retailing. He says many are simply “smaller versions of the regular stores” and points to the expertise of retailers such as Japanese convenience store group 7-Eleven, where product categories are often more sophisticated.
“We’re starting to see it happen in the UK and I think Morrisons has also raised the bar in terms of fresh food in the c-store format,” he says. “But the current demise of big-box retail is partly because of the economic cycle and when we do get an upturn some of those categories may improve.”
Supermarkets may not want to rival specialists for breadth anymore, but there is still a place for the one-stop shop, and the supermarkets know it.
The innovation game What’s happening overseas?
While the UK has a highly developed c-store sector, other nations - notably France and Japan - have pioneered a host of innovations. Japanese convenience store groups are reaping the rewards of aggressive store opening programmes and expansion of their prepared foods and private-label products.
“The kings of convenience are Japanese operators, such as 7-Eleven and FamilyMart,” says Kantar’s Bryan Roberts. “They have perfected dayparting [switching products and merchandise at different times of day] and we’ve seen Tesco Metro doing some interesting work in this area.”
It is paying dividends: Japan’s Seven & I Holdings, owner of the 7-Eleven convenience store group, posted a 9.5% rise in its first-quarter profit, the highest on record for the March to May period, while FamilyMart has expanded to more than 20,000 stores and is to roll out 600 new stores in Indonesia and the Philippines by 2015, expanding on a network that includes more than 10,700 shops outside Japan. Closer to home, French grocer Auchan has adapted its Drive click-and-collect model in a bid to raise its sales of fresh food in France.
The new format Arcimbo store in Villeparisis, Seine-et-Marne opened on February 28 and, alongside the drive-thru click-and-collect, includes a small food store featuring fresh meat, fish, fruit, vegetables and a bakery.
Auchan and DIY group Leroy Merlin have also been involved in a pilot project with 900 consumers testing fingerprint-based technology for purchasing goods and services.
The trial, conducted by user-authentication specialist Natural Security, involved payment using a combination of a card storing the client’s biometric data together with a reader that authenticates the presence of the customer by reading their fingerprint. After the trial, 94% of participants said they would use the system.