15 January 2015

Supermarket shopping took off in the UK in the 1960s revolutionising the way people shopped for groceries.  Over the years the format evolved with the addition of fuel retailing, and more recently, a range of non-foodstuffs, principally clothes and electrical goods. Another revolution in the way we shop for food is underway and having a profound effect on both the existing supermarket model and demand for retailing space.  For decades supermarket operators built increasingly larger stores at highly accessible, edge of town locations offering multiple, competitively priced product lines, free car parking and fuel sales.  In recent years, the “Big Four”, Tesco, Sainsbury’s, Asda and Morrison’s have dominated the retail sector accounting for over 40% of total retail sales in the UK.  

Supermarkets here typically comprise 50,000 – 70,000 sq ft although Tesco in particular has been upsizing in recent years culminating in the opening of its Craigavon store which extends to approximately 113,000 sq ft.     However, changing shopping patterns have all but ended demand for new supermarket space challenging the viability of the 100,000 sq ft plus superstore.

Consumers are now thriftier and the big weekly shop has shrunk.  Instead we are topping up during the week in a number of different outlets with discounters Iceland and Lidl significant beneficiaries.  Certainly Lidl has upped its game in terms of quality and market perception attracting shoppers across the socio-economic spectrum and rendering the snobbish view of Lidl as solely for households on a budget ‘old hat’.  In contrast to the “Big Three” represented locally, Lidl has expanded its portfolio recently opening its 38th store in High Street, Belfast.  Typically Lidl occupies units of 10,000 – 12,000 sq ft and is mainly the only food retailer in this size bracket, leaving the company in a strong negotiating position when bidding for properties or sites to accommodate its property model.  Whilst Aldi has not committed to opening a store here it would not surprise me if it did so in the future.

The rapid growth of on-line shopping for electrical and high- tech goods is well established and is one of the reasons why the 100,000 sq ft plus superstore is past its sell-by date.  Increasingly we are doing our big food shop on-line and having it delivered to the house or using“ click & collect” schemes. However convenient this may be for the consumer, the fees we pay for home delivery don’t come close to covering the cost of this service; supermarket operators are effectively providing a subsidy in order to retain customers.  

As this trend inevitably increases, supermarket operators will need less retail space and  seek to cut costs by servicing home delivery from non-retail units where rent and rates are much cheaper.  In parts of England, principally around London, Tesco has already opened a number of ‘dark’ stores.  Although the term has a somewhat menacing edge, these are non-retail warehouses on industrial estates servicing Tesco’s local on-line business.  The benefits are obvious; the property operating cost of a ‘dark’ store may be a third that of a retail store.  Although we haven’t yet seen supermarkets implement a store closing programme, the ‘space race’ has well and truly ended as clearly indicated by Tesco’s announcing the closure of 43 unprofitable stores across the UK, some of which will be convenience stores. Although the locations have not been revealed, and there is no suggestion any are in NI, it remains a possibility. Tesco are also shelving plans to open a further 49 new "very large" stores. While there have been no similar proposals from Sainsbury's and Asda, some rationalisation of their estate cannot be ruled out.  As a  consequence, we are likely to see little or no rental growth in the existing portfolios.

The other major beneficiaries of top-up shopping are convenience stores, which are primarily located in town centres and neighbourhood schemes and also on filling station sites fronting major arterial roads to catch us on our morning and evening commutes.  While they mainly target the basket or top-up shopper, the trend towards adding complementary in-store amenities such as post offices, hot food counters and butchery franchises is growing.  

The Henderson and Musgrave groups dominate the convenience market locally. Henderson, trading under the Vivo, Spar and Eurospar brands, services over 400 outlets whilst the Musgrave Group operates the Supervalu, Centra and Mace brands servicing over 250 outlets across the province. 

 Costcutter and Nisa make up the other well-known brands.  Competition in this sector for well-located, high-performing sites is fierce and as well as sustaining strong property values, it is not unusual to see six and seven-figure premiums being paid for goodwill, fixtures and fittings.

While the big supermarket brands have also identified convenience shopping as a growth area, Tesco is the only one to have invested in this sector in Northern Ireland and now has 18 trading convenience outlets with more in the pipeline.  Effectively the company is reintroducing the grocery shop back into urban centres and that can only be a good thing for the viability and vitality of these centres which have suffered badly throughout the recession.  Sainsbury’s and Asda have not yet entered the local convenience store sector, but that cannot be ruled out given an increased focus on their convenience business.

As consumers we are forcing food retailers to rethink their business models and property portfolios.  There is no doubt that supermarkets will remain our primary destination for grocery and household staples, but they will have to work harder to retain our loyalty.  Grocery shopping is becoming “multi-channel” and offering us myriad options to spend money in these mega businesses.  We can also expect to see major supermarkets offering additional services including banking, optometry, leisure, recipe and lifestyle advice to attract us in-store.  The discounters will continue to increase market share although a concerted effort on behalf of the big supermarket operators may limit their growth.  Convenience shopping will remain a key option for consumers, and if improvements made in the quality of produce, value and range of services are maintained, this sector is likely to expand in Northern Ireland.  Indeed, we may reach saturation point particularly if Sainsbury’s and Asda enter the convenience market, however, we are not there yet.

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