As Richard Curry, partner at retail and leisure group Rapleys, explains, while the supermarket price war is, on the surface, beginning to impact on retailers’ profits, scratch a little deeper and you’ll find an altogether different story.
In its most recent financial results, discounter Aldi reported a 17% drop in its operating profit, as it continues to do battle with the so-called ‘Big 4’ (Tesco, Sainsbury’s, Asda and Morrisons), in addition to fending off the competition from fellow Teutonic grocer Lidl and the eCommerce contingent spearheaded by Ocado.
At first glance, it might be assumed that the UK’s fifth biggest grocer has hit its glass ceiling and rebounded with a thud back to earth.
However, what is sitting behind these results is not only rising sales growth (up to 13.5% from 12% in the previous period) but also an expansionist investment policy that is aimed at cutting prices for customers and having 1,000 operational UK stores by 2022.
While some of its competitors may be refining rather than expanding, Aldi is certainly not alone. But in this landscape - driven by the pressure exerted by the discounters, the expansion of the convenience market, and the growing impact of eCommerce – what exactly this bricks-and-mortar footprint looks like is a key consideration for food retailers.
The ‘Goldilocks’ Portfolio
For the ‘Big 4’, bigger was often seen as better in terms of property requirements, as they diversified product ranges beyond food and sought to be ‘all things to all men’. Competition from online and discount retailers has seen supermarkets reassess this strategy and operators are now getting back to their core business purpose: food retailing.
The impact of this has been a general downsizing across portfolios and/or a targeting of sub-lettings or arrangements with partner brands.
Indeed, some operators have explored franchising themselves, particularly into the roadside market – with Morrisons’ recent partnership with Rontec a prime example of a food retailer tapping into new markets while limiting capital commitment.
Others, meanwhile, are seeking to enter new markets - while mitigating risk and minimising overheads - through convenience acquisitions. It remains to be seen just what impact the proposed Tesco/Booker and Co-Op/Nisa mergers will have on the market.
Smaller is not necessarily a panacea, though; optimising assets to better match the core retail function of the business is key.
For example, M&S announced in 2016, amid declining clothing sales, a move to shrink the footprint dedicated to fashion and a re-allocation of space to its luxury food offer, which continues to perform well. Meanwhile, Co-Op disposed of almost 300 stores to convenience chain McColls, primarily because the stores were considered too small for the format the Co-op are aiming at throughout its trading portfolio (4,500sq.ft.GIA).
This adds up to an environment where food retailers are being far more selective in terms of their store requirements – not too big, not too small, just right.
With this in mind, the optimum food retail property will broadly fall into one of three categories, with close attention paid to the gross square footage vs. the square footage operationalised for sales:
Firstly, the 3,000 sales / 4,500 gross sq. ft. convenience store; which is located within a major city, neighbourhood parade or proximity to a significant transport hub.
Secondly, the 7,000 sales / 15,000 gross sq. ft. expanded convenience store; generally located in commuter hotspots or just out of town. These don’t need to be 24/7 stores, with consumers peaking generally in the early evening but they require more diverse product ranges to the classic convenience stores.
Lastly, the ‘superstore’, whose optimum size has shrunk from historic footprints of up to 100,000 sq. ft. gross to a more streamlined 25,000 sales / 40,000 gross sq. ft.
On the other side of this coin, though, is the challenge of ensuring these properties are optimised to survive in the digital age.
Demand And Disruption
The exponential growth of ecommerce has been well documented, with many predictions that online platforms will bring about the demise of the high street and bricks-and-mortar retail – including logistics expert Parcel Hero. This mirrors the significant investment by market players such as Ocado, which recently geared shareholders up for a multi-million pound outlay on robotics and warehouse automation.
Consumers continue to want convenience, and digital accessibility, and this is necessitating innovative approaches to sales and distribution.
The success of e-commerce operators and the launch of new challengers like Amazon Fresh may, in the long run, impact on bricks-and-mortar food retail (and increase the prominence of logistics and warehouse facilities as assets), but the impact on the food retail market of these disruptors has been slower than predicted.
Part of this is due to the logistical challenge of high volume storage and distribution of fresh produce (it is little wonder that Iceland has arguably the highest scale potential for eCommerce), but a large part is simply due to the fact that consumers still demand a physical shopping experience for certain types of product.
When Amazon announced its takeover of Whole Foods in June 2017 – giving it more than 450 stores in the US and nine in the UK – this became even clearer. Retail doesn’t need to be either on or offline - the two are complementary.
This is particularly relevant for large operators who have surplus store space. For example, instead of subletting to a complementary retail or lifestyle brand, Sainsbury's took the positive step of acquiring a company, Argos, to both reap the benefits of cost reduction per sq. ft. and improving its EBITDA, while also inheriting an established logistics network and providing customers another purchase option in-store.
For supermarkets, developing a portfolio and in-store offer that connects between digital and physical, whilst encouraging shoppers into bricks-and-mortar and extending dwell time, will be key.
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