31 January 2017

Would Andy Murray be a multiple grand slam winner and world number one without Novak Djokovic? Or would Rory Mc Ilroy be as good as he is if Tiger Woods hadn’t set such a high standard? The point is competition is what drives improvement. When one player or business raises the standard and wins big it inevitably forces competitors to respond by raising the bar even higher.

Having developed a speciality in providing property-related advice to the PFS/convenience sector over the last 15 years, I have visited a lot of sites across Northern Ireland and I have seen first-hand how the offer has improved dramatically, particularly in the last five years. In NI we are fortunate to have a number of corporate players, as well as independents, who are at the top of their game when it comes to innovation not only in what is offered but in how it is presented.

The emphasis has clearly shifted from a fuel forecourt with a shop attached selling basic staples to larger shops with a PFS attached.  Indeed it is remarkable that forecourt shops have thrived at the same time as visits to forecourts have reduced due to more fuel efficient vehicles. Much has been written about shopping patterns moving away from the big weekly shop to more frequent convenience shopping. It would be unfair to simply conclude convenience shops have benefitted from this trend when in fact, in my view, they have been drivers of the trend by offering a greater range of goods and services, attractively presented and at great value. It is noticeable how much more fresh food is on offer from fruit and veg to meat, poultry and fish, deli and bakery ranges. In some of the larger shops this has been taken a step further with the butchery counters franchised to local brand operators thus enhancing the product range and knowledge further. The returns to retailers from franchise fees linked to turnover can be significant and more than offsets the loss of profit associated with reduced direct sales. 

Off-licences and Post Office counters are other significant footfall drivers. In the case of Post Offices the latest formats are much more integrated into the shop being a dedicated counter beside the shop tills rather than the impersonal secure standalone kiosks commonly seen. The benefits of this innovation are many. Firstly the counters take up much less valuable space thus releasing space for other product display. There are clear efficiencies of operation as the counters can be operated by trained shop staff who can split their time between the Post Office counter and other tills as required. Customers benefit also as the Post Office services are available throughout full shop opening times.

The most noticeable recent innovation is the expansion of the food to go offer. Whilst the traditional Ulster Fry is still usually available consumers now have a much greater variety of tasty snacks to choose from.  Increasingly retailers are franchising in store outlets to specialist operators for coffee, sandwiches, burgers, noodles and the like or operating them directly under licence. The M1 and M2 Applegreen sites are the most obvious examples, however, similar configurations are found in other shops albeit on a reduced scale. Again the secret to the success of these outlets is quality and convenience. This trend is likely to continue as time- poor customers embrace them as an alternative to cooking. 

What are the valuation outcomes of all this innovation? In simple terms the value of a convenience shop is intrinsically linked to the trading potential of the site. A high profile location with good accessibility and parking are fundamental, as are the extent and quality of the competition in the catchment. This can lead to unexpected outcomes with sites in smaller settlements with less competition being more valuable than sites in larger settlements which suffer from greater competition, particularly from the big three supermarket brands. 

This niche sector of the property market has bucked the trend of the wider market in recent years as prices have generally been rising driven by strong demand particularly for the best performing sites. This has also manifested itself in big money paid for the goodwill fixtures and fittings of the business. Indeed it is not unusual that the value of the business is equal, if not greater, to the value of the property. 

The market is dominated by the wholesale/retailers, principally the Henderson and Musgrave Groups although Applegreen, Maxol and others are also expanding their presence locally. In 2016, Mc Colls acquired five Co-Op stores in NI as part of a larger 298-portfolio purchase. It will be interesting to see if they grow the brand in NI or off-load these stores. The wholesale/retailers can generally outbid a non-wholesale business since they are driven to secure the future wholesale income stream and will factor the wholesale profit into their bid. As most of the deals are off-market and there is little transparency, a proper analysis of transactions is challenging. It is a difficult market for the inexperienced to read and understand.

An unwelcome effect of the increasing value of this niche property sector was the significantly higher rates valuations following the 2015 rates revaluation in NI. It was not unusual for rates liabilities to go up by 50% to 100%. This was a shock for most retailers and although we conducted many successful appeals, most businesses had to absorb an increased rates liability. This sudden increase was that the result of a 12-year gap since the previous revaluation and, for the reasons touched on in this article, PFS/convenience properties had increased significantly in value relative to most other property classes. The next revaluation is proposed for 2019 and whilst further increases are quite likely they will be much more modest than in 2015.

The PFS/convenience sector is a good example of how customer focus and innovation coupled with healthy competition can drive performance. It has met the challenges of higher rates and the minimum wage increase and continues to thrive. All the signs are that the sector will remain buoyant and that will manifest itself in strong underlying property and business values in 2017.

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