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Just three days before Christmas the Times published a spread under the headline: “Domination on the edge of town: crisis aids the march of the supermarkets”. This weekend, the Financial Times said: “End of space race. Tesco change marks turning point for UK food retailing”.
The truth will be somewhere between the two stories. In December, experts were telling the Times that the scramble for grocery space would run and run. One reason for this was because local authorities in deprived areas believed the supermarket brands would create jobs (a claim disputed by the Association of Convenience Stores based on its analysis of supermarkets’ own figures).
Leading City retail analyst Dave McCarthy warned for most of 2011 that the supermarkets had got their sums wrong. While opening new space made sense for each group separately, the collective volume of space would cut like-for-like sales in both value and volume terms.
Think of it this way. You have a shop with sales of £30,000 a week and operating costs of £25,500. You are making 15 per cent margin. Every time you open a similar shop, your operating costs are the same. But as the market is already saturated, your sales for each shop falls by £1,000 every time you open a new one. After opening five extra shops, you have £150,000 of sales (six by £25,000) but you are making a £300 loss.
This is an oversimplification. The teams running Tesco are among the best retailers on the planet but they have lots of levers to pull and lots of targets to hit. After 20 years, something is going wrong and the management cannot figure out what that is.
To Dave McCarthy, the big issue for Tesco was that all its competitors are much stronger than they used to be. Most retailers are at least as good in terms of presentation, promotion and product assortment. If Tesco slashed prices, its profit margins would be hit hard. However, Mr McCarthy worked out that Tesco could afford this but competitors like Sainsbury could not. Therefore, Sainsbury would have to stop opening new space and Tesco would win.
For local retailers that remans a big threat. The profit warning issued by Tesco may remove one of the barriers to it slashing prices – the fear of doing less well than when Terry Leahy was in charge.
What is clearer after the profit warning is that while the out-of-town model is under threat from the internet, this mainly impacts on non-food sales. The FT identifies three trends:
Shoppers no longer want everything under one roof.
They want to shop locally and take less time about it.
They want to avoid the temptation of buying what they do not need.
This analysis explains why the multiples want to invest in c-stores. In the short term, this investment is likely to help independent shops as they will benefit from the extra local footfall that the supermarket brands are encouraging. But there can be no room for complacency, the multiples have a reputation for excellent execution and they are paying a lot of attention to what local shoppers want.
So don’t believe newspaper headlines suggesting that the multiples are out of favour with shoppers. You still need to fight for every shopper, every sale.
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