Why are supermarkets focused on revamping existing stores over buying or building new ones?
Tuesday 7th March 2017
Andy Brian, Partner and Head of Retail at Gordons, examines why the major supermarkets operators are focusing on revamping and remodelling existing stores rather than expanding their big store portfolio.
The four major UK grocers have long been vying with each other for floor space. For many years the trend was to open as many new stores as possible to increase coverage, but in recent years we have seen a shift in that trend for a variety of reasons.
Tesco made the headlines in January 2015 when it revealed that it was shelving plans to open 49 ‘very large’ new stores across the UK, and there followed a general downturn in demand for new supermarket locations over the following two years. As many as two-thirds of planned new large stores have been cancelled by major grocers in that period.
Current planning applications from ASDA, Tesco, J Sainsbury and Wm Morrison reveal that just three new stores are set to open this year, compared with 20 two years ago, and this trend is set to continue.
Waitrose has revealed that it is shelving plans to open seven new stores and will instead shift its focus towards revamping existing locations, including introducing wine bars into some, and J Sainsbury has announced a similar strategy.
Commercial pressures
Commercial pressures heading into 2017 are clearly playing a big role in these decisions. In reality, we’re not entering a new period of buoyancy, despite what the grocers would like you to infer from their Christmas trading figures.
In fact, 2017 is set to be one of the most challenging years for some time, and it’s likely that we’ll see a rise in the cost of our shopping baskets as a result.
The most obvious driver is rising food prices. We import more than we export, so the cost of consumer products, including food, will generally increase when the value of the pound is lower on currency exchange markets.
The rate of inflation is forecast to rise further during 2017 and we’ve already seen the likes of Premier Foods challenge supermarkets in their pricing negotiations.
There are other factors too. The forthcoming business rates revaluation, Apprenticeship Levy and National Living Wage are set to squeeze big business margins even further, which will put pressure on the big four grocers to raise prices as they seek to maintain profit levels, never mind trying to bring them back up to something like the levels they previously enjoyed.
Changing habits
In recent years, supermarkets have been forced to change their strategies to reflect a significant change in consumer shopping habits. This migration to a different way of buying household essentials and luxuries shows no signs of slowing down, and those retailers who adapt most intelligently their offering, product range and pricing will benefit the most.
More and more consumers are opting to pick up a smaller basket of groceries on several weekly visits, often to different supermarkets, to take advantage of price competition. The rise in popularity of online grocery shopping has also had an effect, together compounding to dilute the popularity of a traditional ‘big shop’.
So, increasing the number of stores which cater to the weekly or monthly “big shop” has become less of a priority.
What this means for supermarkets, therefore, is a focus on revamping the look and feel of their stores, and an all-round improvement in their offer.
Rather than investing in new stores, some of the grocers are focusing on improving the instore experience within their existing estate, including better cafés with nicer coffee and free Wi-Fi, bakeries, wine and juice bars, and related concessions to attract new customers and increase footfall. It will be no surprise to see the other major supermarkets follow suit.
It will be interesting to see how this develops over the coming months as supermarkets are forced to decide whether to forge their own path or hold back and learn from the mistakes – or successes – of the competition.
If you need legal advice on any retail matters please contact Andy on 0113 227 0354 or andy.brian@gordonsllp.com. For more information about us please visit www.gordonsllp.com/sectors/retail-lawyers/.
