Grocers are moving away from hypermarkets to focus on a more diverse portfolio that recognises the importance of ecommerce and convenience.
No one appears to be winning the space race anymore. Tesco thundered ahead with its expansion programme, only to take a domestic performance hit, Asda and Morrisons remain geographically imbalanced despite continuing talk of growth in the Southeast and through smaller formats, and the halcyon days of the 100,000 sq ft super-tanker hypermarket appear to be over.
That desire to dominate non-food in the same way as food remains, but now it is the endless store of the internet, not the lengthy aisle of the superstore, where growth is concentrated.
All the big supermarket groups have conducted serious reviews of their portfolios even while there has been a surge in development activity. Development has increased by more than half since the start of the credit crunch, according to property adviser CBRE. It calculates that the supermarket pipeline in the UK has grown by a startling 57% since September 2007 and that the amount of new space in the pipeline at the end of the first half of 2012 increased to 5.34 million sq ft. Supermarkets now account for 38% of all shops in the development pipeline, up from 25% four years ago, and 39% of space under construction.
However, the growth surge is no longer affecting every grocery format in the same way. As the rise of online shopping calls into question the viability of developing additional hypermarkets, several big grocers have proclaimed that instead of 100,000 sq ft stores, they will in future develop at between 60,000 sq ft and 80,000 sq ft.
Grocers have developed a twin strategy. Many are exploring a next generation of supermarkets close to urban conurbations and a heavy bias towards the high street, as well as convenience stores.
CBRE director Chris Keen says: “The main push continues to be for edge and out-of-town space because of its accessibility. Grocers are, however, also acquiring additional high-street stores, particularly in conurbations where it is more difficult to obtain planning permission for superstore developments.”
On the bandwagon
The big growth in convenience has been led by Tesco and Sainsbury’s, but all grocers are exploring options. Morrisons continues to promise a roll-out of its M Local format, having announced in February that it was targeting 300 openings of the c-stores by 2014, while Asda acquired the Netto estate, although those stores are larger than the typical high-street c-stores. Waitrose revealed in July that it would open an additional 20 Little Waitrose c-stores in and around London over the next 18 months.
The appeal is clear: UK c-stores’ sales are forecast to reach £44bn by 2017, according to the latest research from IGD. That represents a 29% increase from the current value of £34bn. The average annual growth rate for the convenience sector is expected to be 5.1% between now and 2017.
IGD’s research shows that shoppers are favouring a ‘little-and-often’ approach, with 49% now doing their grocery shopping three or more times a week, compared with 39% in 2009, while 72% of c-store shoppers can see themselves using such shops to pick up parcels if they are not home for a delivery.
Joanne Denney-Finch, chief executive of IGD, says: “The convenience market is benefiting as people favour a ‘little-and-often’ approach to their food shopping that helps them budget and spread the cost. The sector is also more competitive than ever, with stronger promotions, greater choice of goods and better value for money. “ She also points out: “Nearly three-quarters of convenience stores are still independently owned, either by an unaffiliated retailer or as part of a symbol group such as Nisa or Spar. So they stand to benefit from the considerable interest in supporting local communities and businesses.”
That opportunity to acquire rather than grow organically will likely lead to consolidation. Morrisons especially has been slow to develop smaller stores, despite its ambitions.
“It obviously has a national distribution network so can start to grow organically. However, we expect Morrisons to look at acquisitions as a way to secure market share quickly and to enable them to operate convenience more profitably,” says Keen.
“It has been widely reported that [Morrisons] in discussions with Costcutter but there are many other opportunities. Non-affiliated independents account for a whopping 41% of the c-store market and the symbol groups (Spar, Costcutter, Musgrave etc) account for a further 31%. There is bound to be considerable consolidation in this sector and so the net gain of new space may not be as much as many think.”
The other advantage of looking at c-store development is that planning is generally far easier, with many stores locating in existing retail sites. Local opposition tends to be less vociferous too, although new development has not been without some challenges.
Bob Robinson, managing director of consultancy DPP, says: “In terms of c-stores, a lot was made of the conversion of pubs to supermarkets but really it reflects convergence of requirements: the lack of stock available to convert and the need for pubs to dispose of properties. Again a lot has been said about the ongoing review of changes of use in respect to this but I fail to see in practice how a rule can be written to define an independent versus a chain, so applying it in practice would be very difficult.”
However, not all grocers are thinking alike. Sainsbury’s has pledged to continue developing hypermarkets, while Robinson believes that while Morrisons is keenly looking at store sites in and around the M25, it may not actually be so bullish about c-stores.
Instead, Robinson feels that supermarkets in the 15,000 sq ft to 20,000 sq ft range may be where more of a push at the smaller end comes. “Urban stores with a wide offer are becoming popular again and Asda has traded well with its Netto stores,” he explains. “I would not even discount the mid-range European grocers from taking another look at the UK.”
However, while the general shift may be towards smaller stores, Mark Price, managing director of Waitrose, is among those concerned that regardless of format, too much space is being developed. He said earlier this year that while over the last two years (2009 to 2011), the space dedicated to food and grocery in the UK rose by more than 13%, the increase in sales value over the same period was just 6.8%. Citing forecasts for 2011 to 2015, he believes the situation is likely to be further exacerbated.
Others feel that the race for space has already taken a different direction. “The days of retailers developing for market share are over,” says Russell Walker, associate partner and foodstore specialist at Briant Champion Long. “In the current phase of development we have seen the big grocers battling for market share, but generally that is not going to work any longer in most locations. Instead they want to build profitable sales, which means being far more selective and strategic about where and what size they build those stores. There will be less cannibalisation through expansion in future.”
So, the space race is changing direction. Walker expects most of the next phase of development to be in urban areas, whether on the edge of towns or in high street c-stores, and concludes: “Although Tesco is not now as acquisitive as it was last year, this has served as encouragement to the other operators who see that competition for sites is slightly less intense than it was. Asda, Sainsbury’s and Morrisons are still very much in expansion mode.”
Exploiting a wide armoury of formats, grocers are considering where they need greater coverage.
The biggest growth area is in the Southeast, according to CBRE. In 2011 Morrisons opened 15% of its space in the Southeast but in 2013/14 it has said it will be 60%.
Morrisons has 10 superstores under development within the M25 and aims for 10 more in next five years.
That said, Sainsbury’s says its focus is in the North, West, Scotland, Wales and Northern Ireland.
All the big four are also under-represented in the Southwest.
How space will be developed in future
CBRE director Chris Keen shares his thoughts on how he sees expansion playing out:
“Morrisons opened more space than planned in 2011 at 643,000 sq ft and intends to open 2.5 million sq ft in the next three years.
Sainsbury’s opened 1.4 million sq ft in 2011 and 1.5 million sq ft in 2010. It is likely to open about 1 million sq ft a year going forward. This means it can be a bit more picky about sites and 1 million sq ft to 1.5 million sq ft is a sustainable level, given there is a physical limit to what a retailer can open each year (capital expenditure is not unlimited and even things like store recruitment and marketing have to be resourced).
In 2011, Sainsbury’s opened 10 superstores averaging 39,000 sq ft, 15 extensions averaging 15,000 sq ft and 73 c-stores. It has said that it is going to open a mix of superstores, extensions and c-stores going forward and I expect a similar proportion of each.
It is well documented that Tesco is going to open 38% less space this year but that is still a substantial 1.5 million sq ft of new space. It may be cutting back but that is from a one-off surge last year which was never going to be repeated, given the physical challenges of resourcing such growth.
Tesco will likely cut back on rolling out its very largest stores, but not stop altogether. It is inevitable it will be more picky if there is less investment in that part of the business. There were never that many developed each year due to the challenges of planning and finding large sites and so it is not going to have quite the impact people think.
Asda has said very little and it is only Sainsbury’s which is giving an indication of the split between hyper, super and c-store.”
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