COMMENT Supermarket shelves have been a barometer for the nation’s overall state of mind for a large part of this year. Thrust to the forefront of the crisis, the major brands have scrambled to keep aisles full in response to panic-buying and fulfil mounting online orders as many people bought their groceries online for the first time.
Some of the changes introduced to meet soaring demand will irrevocably alter not only how we access our groceries but also the logistics and supply chains that serve supermarkets. Necessity has supercharged transformation, some of which was already in existence but moving at a more cautionary rate.
Logistics take-up doubles
From a numbers perspective, in 2020 supermarket logistics space take-up has nearly doubled on 2019, with 1.3m sq ft secured compared to 754,700 sq ft last year. However, this has been almost entirely driven by a mega-deal by Aldi.
Looking back further, since 2015, the major supermarket chains have taken directly, or through third parties, around 13m sq ft of distribution space, equating to 7% of gross overall take-up. However, portfolio consolidation by more established operators has diluted net absorption driven by discounters’ rapid network expansion.
Over the past five years some clear themes have emerged including the expansion of discount retailers and the degree of consolidation among top players, plus growth of e-commerce platforms. These evolving trends are now being catalysed by the underlying demands driven by the pandemic.
Some of the changes introduced to meet soaring demand will irrevocably alter not only how we access our groceries but also the logistics and supply chains that serve supermarkets
Before this year both demand and supply factors have held back online groceries sales. On the demand side, ‘convenience’ considerations have traditionally steered consumers towards local shops. While no doubt many will go back to shopping in-store as soon as the pandemic subsides durably, some of the newly acquired online customers will continue to shop online. For example, M&S said 365,000 of its existing customers had used its website for the first-time during lockdown, while another 315,000 had either tried it out or returned as shoppers.
On the supply side, the pandemic has forced supermarkets to rapidly ramp up their online capacity to meet demand. Tesco for example has increased capacity from 600,000 to 1.3m slots per week. This means many brands are now better placed to service existing and new online customers. Supermarkets with limited, or no digital offering, were already considering a move into the online space pre-Covid-19 and those plans are moving forward with greater pace. For example, both Aldi and Lidl are now piloting online initiatives.
Given these ongoing changes, even when the Covid-19 crisis is over, it is not unrealistic for the share of online grocery sales to remain in double digits, from the pre-pandemic level of 5% to 6%. Other initiatives include greater availability of same day deliveries. The Co-op now plans to offer same-day online city-centre deliveries from 650 stores by the end of the year. Sainsbury’s launched Chop Chop, where customers can have up to 20 products delivered within an hour. Similarly, Ocado recently launched Zoom, its new one-hour delivery service for customers within a 5km radius of its Acton warehouse in West London. Fast deliveries could become a new normal, serving as top-ups between larger shops.
Dark space emerges into the light
Greater penetration of online groceries will undoubtedly boost demand for warehousing space from dedicated online operators like Ocado. One factor that may curb new demand is the quantum of unoccupied/underutilised space that some supermarket chains have in their distribution depots (often let on the long term). As seen at the onset of the pandemic, some companies have re-occupied this grey space instead of seeking new premises. Presently, Cushman & Wakefield estimates that dot.com fulfilment depots and ‘dark’ stores account for over 5m sq ft of distribution space nationally. While this is roughly the average annual amount of space taken by Amazon since 2015, it is an area where we expect further growth and innovation.
The shift to online shopping presents supermarkets with an opportunity to reduce the amount of expensive retail space they occupy, or to repurpose it. For example, to double its online capacity in the UK, Tesco plans to convert underutilised retail floorspace into micro-fulfilment centres. Overall, for food retailers, decisions regarding fulfilment of online orders and the optimal equilibrium between retail and warehouse space need to be balanced against margins in what remains a very competitive market that tends to prioritise market share over profit. As a result, logistics property looks set to emerge as net beneficiary of the trends currently shaping the food retail sector, many of which have changed forever how we access essential products.
Bruno Berretta is an associate director in the UK logistics and industrial research and insight team at Cushman & Wakefield
