Tesco will not take January’s profit warning lying down and as it reappraises its store offer the implications will be felt across the grocery sector. Mark Faithfull looks at how supermarkets are realigning their store spend.
They have developed a raft of formats, become dominant both in and out- of-town, released chunks of cash by sale and leasebacks of their portfolios, and survived various Government-led inquiries and even the occasional wrath of a TV celebrity bent on saving the high street. The grocers have, until this year, looked like the great untouchables of a recession-wracked retail industry.
But then Tesco said it has lost market share, and its January profit warning and – by its standards at least – poor trading results have triggered a focus back on its UK real estate, with inevitable consequences for its rivals.
Tesco’s change in tack comes at a time when rivals are ploughing money into smaller stores and Tesco looks unlikely to build the megastores of the past, focusing instead on optimising slightly smaller hypermarkets and leveraging its multichannel sales.
Tesco is certainly not new to flexing its real estate as part of its operational strategy. The UK’s big grocers have traditionally preferred to own their own property because of the freedom it provides them to adapt their stores for the prevailing conditions, changing the internal merchandise mix and adding mezzanines, for instance. Being fleet-of-foot has done as much as anything else to help propel their success and has made their real estate distinctly attractive to institutional investors, a group as far away from the mum-on-a-budget customer as you could find.
Tesco has led the way, giving up small chunks of its vast portfolio in packages to investors on long leases and freeing capital. Sainsbury’s has followed suit, while others such as Morrisons remain more protective of the ownership model.
But the profile of the real estate being developed is undoubtedly changing, primarily in response to the requirements of greater convenience, the impact of austerity and online retailing. So the current mix of hypermarkets, supermarkets and c-stores could be in-line for a reshuffle.
At the announcement of its January trading results, one analyst quizzed Tesco directors as to whether giant hypermarkets had had their day. The question was in response to comments by group chief executive Philip Clarke. He said: “Do you need to build large hypermarkets in the UK when the internet is taking so much growth in electricals, in clothing, in general merchandise?” That could mean in the future 80,000 sq ft stores incorporating click-and-collect points will replace 100,000 sq ft hypermarkets.
Bob Robinson, chairman of planning consultancy DPP, says: “There’s no doubt that the impact of online sales on non-food is reshaping the supermarket group’s thinking.” He adds: “There are still gaps where a hypermarket could be developed and a lag in the pipeline of planned large stores, but those are likely to be slightly smaller than in the past because of online.”
Tesco has built up a sizable pipeline of proposed stores of all formats, but Clarke will have to weigh up further expansion, especially for Tesco’s 1,300-strong portfolio of Express stores, which dwarfs that of its rivals and which some analysts believe may be cannibalising sales across the estate. An in-house team has also been reviewing possible acquisitions; particularly those that would complement its online operation or that would improve its click-and-collect capabilities.
Tesco will also face fiercer competition from two of its main rivals, which have been slower to adopt the compact store format. Morrisons revealed at its annual management conference that it plans to open 300 of its M Local stores by 2014 after successful initial trials, while all of the grocer’s supermarkets will be reworked into its Stores of the Future concept format over the next three years.
On the small side
Meanwhile, Asda’s Netto acquisition has given it a smaller format – which it lacked – that it says will help it compete with rivals’ opening schedules. The grocer has conceded that acquiring large space is difficult but says it feels confident it has a multi-format business, with stores ranging from 3,000 sq ft to 120,000 sq ft. Asda plans to open 25 outlets this year and the focus will be on stores of up to 80,000 sq ft. The grocer has “no plans” to open any stores larger than 80,000 sq ft in 2012.
“Asda’s former Netto stores are not quite the same as the c-store formats, which are very much aimed at a younger, pop-in market,” reflects Robinson. “They are slightly larger and attract a more mature shopper, who often might visit several times a week, doesn’t want a long drive to the store but does want a comprehensive food offer at supermarket prices. I think we’ll see a lot more 15,000 to 35,000 sq ft supermarkets being developed – in many ways we’re going back to the supermarket model of 20 to 25 years ago.”
British Land head of superstores Bryan Lewis agrees, and says infill supermarkets – stores where there are geographical gaps in coverage – will spearhead much of the fresh stock: “Obviously hypermarkets will continue to open in specific places but in the work we do with supermarket groups we see a lot of interest in mid-size – about 30,000 sq ft – stores. They can be embedded locally, they allow a full food offer and they can be used as distribution hubs, whether that’s in-store or online delivery.”
Indeed, with its conventional stores under attack from rivals, Tesco’s multichannel strategy has become the next key battleground and earlier this year the retailer opened a 115,000 sq ft online delivery facility in Enfield, north London, its fourth ‘dark store’, to meet demand in densely populated areas.
The move also turns the screws on online grocer Ocado, with Tesco now laying claim to 48% of the UK online grocery market, while anticipating overall demand to double over the next five years. Its core, online grocery model remains picking in nearly 300 stores, and its first online-only store did not open until 2006 in Croydon, south London. The £30m Enfield site provides a much higher level of automation, with conveyor belts dispatching trays to pickers, who have hand-held devices strapped to their arms, to fulfil orders from 178 stations. In the three other dark stores – Croydon, Aylesford in Kent, and Greenford in Middlesex – pickers move around with a trolley. Tesco plans to open a fifth such facility in Crawley early next year.
“The grocery groups are constantly innovating and, of course, because of its size Tesco tends to dominate proceedings,” says Lewis. “Food sales online are still in their infancy in the UK and we are seeing store portfolios being positioned to cope with the changing nature of sales and of consumer needs.”
After so many years of focus on the biggest and smallest store formats, there is a back to the future feeling of many of these strategies, albeit that it is modern challenges shaping such thinking. The next generation of giant hypermarkets are likely to be about 20% smaller, as non-food sales shift online, while the need to combine convenience and price-competitiveness may well boost small supermarket development at the expense of pure c-stores. The result? Store development with more than a distant echo to the 1980s.
The grocers’ store portfolios: who’s doing what?
Tesco
Tesco has about 2,720 stores of which almost half (1,285) are its smaller format Express shops. It has just fewer than 1,000 supermarkets and 212 Extra hypermarkets in the UK. Recent years have seen emphasis on its c-store format but questions remain over how much further this expansion can be pushed without cannibalising sales. Its biggest stores are likely to be built at 80,000 sq ft, down from 100,000 sq ft, as the retailer realigns its merchandise mix and optimises click-and- collect provision. Tesco is also opening ‘dark stores’ around the M25 to supply and deliver its online offer.
Asda
Asda has recently completed conversion of its 170-store Netto acquisition into ‘mini-Asdas’, giving it a much-needed presence in the smaller format market. The retailer has about 530 stores, a sharp increase on the sub-400 store level it was operating at before the Netto deal. Asda has pledged further store growth, which is likely to focus on the 15,000 to 35,000 sq ft range, and is unlikely to open stores above 80,000 sq ft.
Sainsbury’s
Sainsbury’s opened its 1,000th store in Irvine, Scotland late last year and has pledged to further expand its formats, citing sales growth of circa 25% for its convenience format, Sainsbury’s Local. About half of its new retail space this year will be supermarkets.
Morrisons
The big push for Morrisons is its M Local format. The grocer plans to add 300 stores by 2014. It currently has a portfolio of about 450 stores and opened 600,000 sq ft of trading space in 2011. Morrisons has also acquired the leases of 10 big box stores from Best Buy Europe, which will be refitted as its subsidiary Kiddicare in a £15m investment programme.
The Co-operative
Total store numbers may have peaked during 2009 after the acquisition of Somerfield but the Co-operative’s portfolio of about 2,900 stores still means it has almost trebled its grocery store numbers in a decade. The retailer intends to open about 300 more stores over the next two years, having completed the absorption and rebranding of Somerfield.
Waitrose
The John Lewis-owned supermarket group has gone from fewer than 200 stores at the end of 2009 to almost 300 by 2012, with its new smaller format stores driving much of the growth and expansion, especially focused around the M25 and home counties.
Investing long term
At the beginning of the downturn the commercial mortgage-backed securities market (CMBS) all but died a death. But who else other than Tesco should reinvigorate it in late 2010 when it put together its first tranche of stores as an institutional investment-friendly package. CMBS is effectively a sale and leaseback vehicle, which means the grocer gets to sell a number of stores as a single portfolio and as its part of the deal agrees to lease those units for typically 20 to 25 years. This frees capital previously locked up in bricks and mortar for the retailer and gives the investor what is perceived as low-risk, long-term income.
“Supermarket retail has outperformed all the other asset classes during the recession,” says Alice Breheny, head of property research at Henderson Global Investors. “When you compare it with shopping centres and retail parks, institutions see it as very low risk, with good income generation.”
Tesco initially used CMBS deals to pay down debt at a time when it was being criticised over leveraging levels and to help finance store expansion abroad. While the store sales made up a comparatively small proportion of its total UK stock, effectively Tesco was calculating that a pound generated through property sales in the UK could be invested more profitably outside its domestic market. Sainsbury’s has also realised a significant amount from real estate where it believes all asset management opportunities have been exhausted.
Others in Europe have followed suit, although often for different reasons. Spanish grocer Eroski has sold off several chunks of property through CMBS in a bid to de-leverage its business, while earlier this year Carrefour announced the disposal to La Française AM of 97 supermarket properties owned by Carrefour Property and operated by Carrefour. Carrefour said most of the €365m (£300m) raised will be reinvested in real estate development projects.
No comments yet