The Golden Age of big-box supermarkets is over, the omens seem to say. The prophecies are bleak and the outlook appears even worse than that suggested by repeated profit warnings.
Across Europe retailers are sifting through the economic ruins and turning their backs on the megalithic stores that were once their sacred places. But don’t believe the prophecies just yet. This isn’t necessarily the end game for the European hypermarket.
In the early days of 2012, as the storm clouds gathered over Europe and the dreaded double-dip became less of a bogey-man and more of a reality, Tesco’s announcement on 12 January seemed the worst omen yet.
For the first time in two decades, Britain’s biggest retailer and Europe’s third biggest, was obliged to announce that it would not achieve projected profits. The UK, it said, had not performed to expectations.
Expansion, both domestically and abroad, had emptied the tills and yielded little return other than ill-will. Tesco’s ambitions to become a global player appeared to be stillborn. In true stoical fashion, CEO Phillip Clarke told reporters: “What doesn’t kill us will make us stronger.”
The news hit the markets like a dirty bomb – by the end of the day Tesco’s shares had fallen by 16%. By the end of the week the supermarket giant had lost nearly £5bn of its value.
As well as being a keen blow to the morale of the sector, the announcement appeared to predict something else. Tesco had learnt its lesson, said Clarke.
White elephants
Coming close to calling his company’s once beloved out-of-town big-boxes “white elephants”, he asked: “Do you need to build large hypermarkets in the UK when the internet is taking so much growth in electrical, in clothing, in general merchandise?” No, Clarke admitted.
In the face of online competition and a shift in customer desires, the big-box selling everything from televisions to TV-dinners was now “less of a potent force”. From now on Tesco would eschew Extras, the mega-stores concept it had championed in the UK, and focus on convenience stores.
Unilaterally, Tesco had called an end to the space race.
As a barometer reading of what is happening to European supermarket groups, Tesco’s announcement seems fairly conclusive. Bigger is not better. The age of the out-of-town mammoths is over. And this is being echoed across the channel.
Less than a week after Tesco dropped its bombshell, Carrefour, Europe’s biggest retailer and the grand-daddy of the big-box hypermarket chains, published its results. They were not good. The European behemoth had gambled everything investing billions of euros on bigger-than-ever hypermarkets – the 100,000 sq ft-plus Carrefour Planets.
Six profit warnings in a little over a year, and it was ready to admit that the gamble had not paid off. Carrefour’s profits had dropped by 20% and its share price had plummeted from around €50 in 2007 to €15.
One result of this is that, for the first time in many years, Carrefour has lost its place at the top of the European retail leaderboard. That place, according to PlanetRetail’s number crunchers, now belongs to Germany’s Schwartz Group, which includes no-frills giant Lidl.
The culprit? Like the high priests of old, Carrefour blamed the Planets. The big-box strategy, its board said, would be “pragmatically reviewed”.
One analyst said: “Carrefour has made a number of mistakes – big ones – and so has Tesco. But this is not a problem that was made by them. It is simply that they are the biggest players with the biggest stores and the biggest exposure. The biggest have the biggest problems.”
Carrefour, like Tesco, Sainsbury’s and Netherlands-based Ahold, which announced strong profits in January, says the future is in smaller, local stores. Indeed, across Europe, the trend for Big Kit appears to be reversing.
Across the continent, the newly dominant format is the convenience store. “Except in the UK, the concept has not had much success – until recently,” says PlanetRetail analyst Matthias Queck. “The main problem was having access to the ultra-fresh products which make these formats work.”
Now, it seems, the time is right. Ahold’s strong results came on the back of its smaller store expansion, including a successful push into the highly competitive German market, where domestic grocers are also trialling convenience concepts.
And even the French retailers, traditionally the leaders of the big-box model, are working on convenience store concepts, with Casino leading the way. Mercadona is doing similar trials in Spain.
It is not just over-saturated Western Europe that is seeing this trend. Queck says: “There’s still 10 to 20 years to go before saturation happens, but the fear of the international retailers is that the saturation problems in Western Europe will be the future of Eastern Europe.
“The demographics are heading the same way – ageing populations and so on. Also, for international entrants, smaller is easier to handle and open.”
Success seems to come in small packages, then. But Lidl’s success is not the result of being locally-minded, as the German giant’s stores are fairly big-boxes themselves.
Rather, it is the focus on driving down costs and keeping prices low that has made Lidl’s owner Schwartz the winner in this recession.
While Carrefour has had to spin off its discount brands and has instead been investing in the new, high-spec Planets, Lidl’s pared-down, price-cutting pallets have proved more successful in these belt-tightening times, especially in cost-conscious Germany, where Carrefour has had comparatively little success.
“The Carrefour business model is inherently flawed, given its over-dependence on a dated format and slow-growth markets,” says Natalie Berg, global research director for analyst PlanetRetail.
“The company cannot carry on it its current state; a more drastic approach is needed to revitalise the business.”
But Berg does not agree that the Planets concept was to blame: “It is a step in the right direction, but it has proven too costly as a means of saving Carrefour.”
Hypermarkets survive
Tom Carlton, property research analyst at Legal & General, argues that the UK could easily accommodate more hypermarkets, and that the days of the giants are far from over.
He believes that the big retailers will expand not just through smaller, local stores, but through a continued divergence into sales of non-food items in larger-format stores.
“What we are actually seeing [in the UK] is a shift to a more Western European model, in as much as the split between food and non-food is going,” says Carlton. “UK supermarkets, especially Sainsbury’s and Morrisons, sell a relatively small amount of non-food products compared with European supermarkets.
“If you look at Sainsbury’s, for example, less than 15% of the business is non-food. But for Carrefour, that figure is 40% to 50% in some stores.”
The reason for this gradual shift from grocery to gadgets and garments is simple – profit margins. A supermarket can make a far better margin on a DVD player than it can on a tin of beans.
In fact, according to Merrill Lynch, the margins on all non-food products are more than double those on food. EBITDAR margins for food retailers across Europe average 8.3% compared with 18% for general retailers.
However, it is exactly those chains with the most exposure to non-food that have suffered most. After all, in a recession, people still need to eat, but they may think twice about that new 3D TV.
Germany’s Metro, the eighth-largest retailer in Europe, has also issued profit warnings, blaming its exposure to discretionary goods through its Media Markt and Saturn electronics arms.
The trend for supermarket chains to incorporate their non-food offer alongside food shows no sign of slowing, despite Carrefour and Tesco’s woes. But, trends are made to be bucked and, in the UK, Morrisons has spent some £15m trialling non-food standalone stores for baby product brand Kiddicare, which it acquired in 2011. It is using 10 of the stores it has paid £40m to take over from Best Buy last year (see panel).
And sales of so-called “discretionary goods” by Europe’s so-called grocers have been increasing at a far faster rate than food sales; Sainsbury’s, for example, reports that its non-food sales are growing three times faster.
False economy
What has been shown to be a false economy is either seeing supermarkets being stuffed too full of non-food items, as in the case of Carrefour’s Planets, or even worse, attempting to establish standalone non-food stores.
“All the standalone formats that have been tested by the major food retailers have failed to gain traction,” says Carlton. “Tesco is set to exit its 13 standalone furnishing stores after poor sales led to a review of its estate.
“George at Asda has also failed on the high street because it was unable to compete with the pure discounters while covering high rents.”
The solution, it seems, is in the balance – and that is exactly what Sainsbury’s, Metro and Lidl are trying to get right.
“While non-food may be far more profitable than food, it is the food offer that attracts people to stores in the first place,” says Carlton. “Given that standalone non-food stores have not worked and there is still a need for at least 40,000 sq ft space for food, the demand for larger stores is likely to remain. Supermarkets are looking to diversify further and increase the range of non-food products and services they offer within their stores, such as doctor’s surgeries, dentists, banks and salons.”
The ideal balance, according to Sainsbury’s business plan, is 40,000 sq ft for food, and a further 20,000 sq ft for “the rest”. And, as planning permissions for new large stores are difficult to obtain, the focus is on extensions.
Sainsbury’s has around 500 stores that are supermarkets but not hypermarkets.This, according to Carlton, implies a significant volume of additional potential non-food space. Indeed, Sainsbury’s is planning to fill a third of its stores with non-food products by 2015.
The Tesco bombshell and Carrefour’s crisis are less evil harbingers than they might at first appear. After all, despite the profit warnings, the retailers are not exactly in trouble. Tesco may not have cleared the 10% returns hoped for by the City, but it still made profits of £3.7bn on more than £67bn of sales.
In addition, part of Tesco’s woes result from increased competition from its domestic rivals, including a resurgent Sainsbury’s, a bullish Morrisons and discounters such as the new European top seed, Lidl.
The food-led retail players may be issuing warnings, but what is coming is change, not Armageddon.
Ireland
In Ireland, a curious combination of circumstances could help Schwartz to take the lead there, too.
The Irish grocery market is dominated by three players – Tesco, Dunnes and The Musgrave Group – which between them have 79% of the market.
The biggest single operator, Musgrave’s Supervalue, has 20%, but a sizeable chunk, 6%, is held by Schwartz’s discount arm, Lidl.
According to Savills, the grocers have been quick to take advantage of the weak performance of non-food retailers, increasing their market share from 50% in 2007 to 60% of all trade in 2011, while turnover fell just 3.4% to €14.5bn, against a 14% drop for general retail.
Savills’ head researcher in Ireland, Joan Henry, says: “Given that the market has been and remains dominated by three big players, it poses the question that there may be room for a new entrant, with a more competitive offering.”
And they may be helped by falling property prices. “Historically, property prices were seen as a barrier to entry into the Irish property market,” she adds. “However, land prices have fallen by 80% to 90%, which presents a considerable opportunity for new entrants.” Or possibly an opportunity for the discount chains.
Poland
Lidl and Carrefour are going head to head for territory in Poland as supermarket development and expansion accelerates in Eastern Europe.
“The domestic chains are expanding well and the international retailers don’t want to be left behind,” says Michal Stepien, head of research for Savills Poland.
In 2012, Carrefour plans to open around 200 smaller supermarkets, Lidl wants to open around 100 discount stores and Netto has plans for 50 new stores.
In all this year, Europe’s 10 largest retail chains are set to open 1,500 new stores in Poland, reflecting a 20% growth compared with 2011.
Polish retail is still considered to be well under capacity, unlike say, the Czech Republic, but the number of domestic players is growing fast. Biedronka, owned by Jeronimo Martins, will have 3,000 stores in Poland by the end of 2015, nearly double its current number. ABC, owned by Eurocash, is opening 600 stores this year, and Zabka will open 250.
A virtual threat?
The impact of the “click revolution” will start to be felt this year, according to the Centre for Retail Research.
At present in Europe, just 3.4% of shopping is done online, compared with 4.6% in the US, but that is predicted to grow by 16% this year. The EC wants e-commerce to represent 6.8% of the market by 2015.
Such a rise would seem to be a big threat to the big-box retailers. Why drive to an out-of-town Tesco when Amazon can deliver to your home?
But some analysts, Legal & General’s Carlton among them, argue that online trade will be a boon.
“Many of the goods people are buying online are click-and-collect,” he says. “Click-and-collect stores are becoming important as fulfilment centres for web purchases, just as traditional shops are.”
PlanetRetail’s Natalie Berg argues that retailers like Carrefour need to do more to address the fact that non-food items are more likely to be bought online. “Until now, Carrefour has done very little,” she says.
“Rather than directing capital towards indulgent remodels, money would be more wisely spent ramping up multichannel functions such as click and collect, in-store kiosks and e-commerce,” Berg adds. “Without this, the hypermarket concept doesn’t have much of a future.”
The UK space race is far from over
Expansion is still very much on the agenda in the UK. Over the past decade, Tesco has added 20m sq ft to its portfolio, doubling its holdings to just under 40m sq ft in what is seen as the biggest single growth by any retailer. The drive is considered responsible for many of the country’s hypermarkets and the out-of-town space race.
And, according to CBRE, there is a further 40m sq ft of supermarket space in the pipeline, accounting for 70% of proposed development.
Asda added 1.2m sq ft last year, partly by buying discount grocer Netto, and has plans to open another 600,000 sq ft in 2012.
Morrisons, which recently bought 10 stores from Best Buy, is adding 800,000 sq ft to its portfolio.
According to Sainsbury’s, the company will focus on “local stores”, but the fine print of the retailer’s strategy suggests something quite different.
Over the next year, Sainsbury’s plans to open 1.2m sq ft of space, largely in the form of extensions to existing supermarkets. Indeed, it aims, where possible, to extend them into hypermarkets.
Asda
Times are changing at the UK’s third biggest supermarket. In the past three years, the Leeds-based retailer, which currently has over 500 UK stores, has bought Netto and made substantial changes to its property team, writes Noella Pio Kivlehan.
Asda bought Netto – the 193-strong budget supermarket chain – for £778m in May 2010. The following year, it was linked to the purchase of Iceland Group, although that has since come to nothing.
However, in the past few months, the Walmart-owned chain has cut back on its expansion plans, admitting that it will not meet its target of opening 150 Asda Living stores over the next three years.
Warnings of a slowdown in the overall market were given last February when Asda’s chief executive, Andy Clarke, said he was not prepared to open space at any cost and would only open new stores when it was felt to be appropriate.
There was also a change in the property team. In January, it was revealed that Steve Masters, retail development director, and Bob Simpson, director of sustainable development, were both leaving the supermarket chain.
This led to a reshuffle of the remaining team. Jo Moon, who was UK property acquisitions director, will now look after the South of England, while Will Smith, formerly of Netto, will take charge of the North of England.
Morrisons
Morrisons set up stall, quite literally, in Bradford in 1899, selling eggs and butter. Now, just over 100 years later, it has become the UK’s fourth-largest retailer, boasting an annual turnover of more than £16bn and a portfolio of more than 450 stores, writes Samantha McClary.For much of its existence, Morrisons has focused its expansion on the northern regions of the UK, but since buying rival retailer Safeway for £3bn in 2004 it has been keen to grow its presence in the South.
Of Morrisons’ 455 stores, just 28 are within the M25 and most of these were purchased via the Safeway takeover.
Nationally, Morrisons boasts a market share of 13%, but in London it is just 6%. And that is a figure the group is not willing to maintain. As such, it has strengthened its property team, promoting development executive Mark Chappell to head of acquisitions for London. He will work alongside head of acquisitions for the South, Helen Rainsford.
The firm reckons there are 6.8m households across the UK that do not yet have easy access to a Morrisons supermarket. To rectify this, last year the group set itself the target of opening 2.5m sq ft of new sales space by 2014. It also plans to optimise selling space through its Liberate project, which aims to free an additional 750,000 sq ft.
As much as 70% of any new space opened over the next few years is likely to be in the South and London, says Rainsford.
“Stores have traditionally been in the North,” she says. “This year the opening ratio is more like 50:50 between North and South, and in our third year it will be more swayed towards the South.”
The group had numerous successes boosting its presencein the South last year, including getting the go-ahead for a 75,000 sq ft store in Walthamstow, E17, a 70,000 sq ft supermarket at Bouygues’ £600m Canning Town project, E16, and a 47,500 sq ft development in Littlehampton, West Sussex.
Chappell and Rainsford are so focused on growing Morrisons’ presence outside its traditional homeland that both agree there is no limit to the number of stores they could open. London is top of the group’s hit list as are suburban high streets and coastal towns. The group has also just bought 10 empty Best Buy stores for £40m for its Kiddicare brand.
“We have a can do attitude,” says Chappell. “We will be looking at how we can take our store formats forward through mixed-use development and secondhand space.”
The retailer is also trialling new store concepts such as the “Store of the Future” and the M Local convenience store (see box), and online development to future expand its market reach.
And with an annual turnover of £16bn Morrisons has the firepower to fund these ambitious expansion plans without major help from the banks.
While tax increases, public sector spending cuts and the squeeze on disposal income saw grocery market growth in the UK fall to its lowest level in more than five years – just 3.4%, Morrisons managed to outperform the market with growth of 4.5% and so is keen to mop up as much more of the market share as it can. As Chappell says: “To stand still in retail is to move backwards.”
Store of the Future
A new-style shop that opens up the fresh fruit and vegetable, bakery and butcher areas of a store to make it appear more like to a traditional market place.
The concept has already been tested in Kirkstall and St Albans, and another shop in Tunbridge Wells, designed specifically as a store of the future, is due to open by Easter this year.
The new-format store presents a broad range of fresh fruits, vegetables, meats and breads in a different way. The height of high-level stands has been reduced so that customers can see over stalls, and any trace of cellophanehas been removed.
M Local
Morrisons is making strong inroads into the convenience sector, which is the second fastest growing part of the grocery market. The group is currently testing its M Local concept, and is eager to secure a suitable site for it in the London area.
