04 Jun 2015
Tesco and Sainsbury’s are opening convenience stores at a rapid rate, but a new space race could create old problems
Little convenience stores could become a big problem for supermarkets
Britainâ€™s grocery industry is in danger of being sucked into a new space race.
The last space race â€“ the battle to open out-of-town supermarkets across the UK â€“ has left the industry in fragile health. There are too many large out-of-town supermarkets, while consumers instead choose to buy their food in convenience stores, with discounters and online.
The â€œBig Fourâ€ grocery chains â€“ Tesco, Asda, Sainsburyâ€™s and Morrisons â€“ spent billions on opening these new stores over the past decade, but their market share has gone nowhere. Tescoâ€™s annual report shows it has 59 shops larger than 80,000 sq ft and a further 123 between 60,000 sq ft and 80,000 sq ft, which is extraordinary. To put that into context, the size of an average supermarket is 25,000 sq ft and a typical Aldi covers 10,000 sq ft.
This rush to open so much space now looks like a moment in time and desperation to appease investors pushing for short-term results. The opening of new shops helped the listed grocers grow sales and masked the fact that shopping habits were changing, and that Aldi and Lidl had reset consumer expectations about how much groceries should cost.
The supermarket still has a major place in how Britain buys it food and accounts for the biggest proportion of grocery spending. The weekly shop is not dead and it remains one of the most convenient ways a family can buy their groceries.
But there are clearly too many shops, and the folly of the space race is laid bare by the latest five-year industry forecast by IGD, the industry research body. This shows that over the next five years spending in superstores and hypermarkets â€“ those larger than 25,000 sq ft â€“ will fall by 2.9pc.
To put that into context, that means sales will fall from Â£71.7bn in the year to April 2015 to Â£69.6bn in April 2020. That is Â£2.1bn of lost sales, the equivalent of one-in-eight Morrisons shops being wiped out.
The situation is little better for smaller supermarkets, those less than 25,000 sq ft. They will see sales grow just 0.9pc in five years, reducing their market share from 20pc of industry sales to 17.8pc. However, in trying to adapt to this changing landscape, the industry risks making the same mistakes again.
With sales in supermarkets stalling, the major grocery chains â€“ particularly Tesco and Sainsburyâ€™s â€“ are focusing more investment on their convenience stores. This means that while the rest of their business is suffering falling sales, at least they can turn to investors and tell them that their convenience store business is growing.
But the IGD predictions are also rather alarming for convenience shops.
The figures say that sales for convenience stores will grow by 17pc over the next five years.
This may sound like a solid performance, but it is only just ahead of the 13pc growth predicted for the industry as a whole and way behind the 82pc growth that discounters will enjoy and the 93pc rise in online sales. It is also a notable slowdown on the 27pc growth that convenience stores will enjoy between 2010 and 2015.
This means that the share of grocery spending made in convenience stores will rise only slightly from 21.2pc to 22pc over the next five years.
This minimal increase in market share does not fit the narrative that more British consumers will pop into Tesco Express or Sainsbury Local on the way home from work to pick up their meal for the evening. Nor does it match up with the investment plans of the big food retailers. Tesco and Sainsburyâ€™s may have put new supermarket developments on hold, but they are each opening roughly 100 convenience stores a year. Marks & Spencer has also pledged to open 250 Simply Food shops over the next three years at a time when it has pledged to open no more extra space for clothing.
According to Joanne Denney-Finch, chief executive of IGD, retailers will find it harder to find attraction locations for new convenience stores and existing shops will face growing competition from discounters Aldi and Lidl as a destination for a so-called top-up shop.
At the same time, supermarkets will start to get their act together and become more attractive to shoppers. The new management teams at the â€œBig Fourâ€ are overhauling the pricing structure in their supermarkets to make them more convenient to shoppers looking to pick up a small basket rather than a full weekly shop. For example, Sainsburyâ€™s has scrapped a “three for Â£10” promotion on its meat in favour of cutting the price of each item to Â£3.30.
This is not to say that convenience stores donâ€™t have a place in the grocery industry of the future, of course they do. They are a vital source of emergency supplies of toothpaste, lunch for city centre workers and snacks for holiday makers about to jump on a train at the station.
But there is a danger that grocery retailers desperate to secure sales growth overestimate their potential. This has already been demonstrated by Morrisons closing 23 M Local shops and abandoning plans to build a convenience store business. There is now a real chance that the new chief executive, David Potts, will sell off the M Local business after he pledged to focus on the companyâ€™s supermarkets. Waitrose is also cautious about opening more Little Waitrose shops, while of the 49 Tesco shops closed by boss Dave Lewis, 18 were Tesco Express and another 12 were small Tesco Metro urban stores.
The appeal of convenience stores is limited. For a start, they are mostly an urban phenomenon. In towns and cities they appeal to workers in the centre and commuters who can pop into a shop next to their local station. But in smaller towns and elsewhere, workers are more likely to drive home or cycle, and have as much chance of passing a supermarket as a convenience shop.
They are also expensive shops to run. Tesco and Sainsburyâ€™s charge higher prices in their convenience stores because of the difficulties in delivering to the shops, their rent bill and the fact they benefit less from economies of scale due to their size.
While Tesco and Sainsburyâ€™s boast of double-digit growth in Tesco Express and Sainsburyâ€™s Local, it can take 10 to 15 convenience stores to generate the same sales of a supermarket.
There is little doubt the expansion of convenience stores over the past decade has cannibalised supermarket sales for Tesco and Sainsburyâ€™s, helping to cause the financial problems facing the industry.
However, the modern corner shop could cause even more damage to the grocery retailers if they do not manage new openings wisely.
Subscribe to our free mailing list and always be the first to receive the latest news and updates.