Bloomberg News

Grocers Abandon Big Is Beautiful as Tesco Leads: Retail

March 26, 2012

A customer holds a shopping basket of goods at a Tesco supermarket. Photographer: Simon Dawson/Bloomberg

A customer holds a shopping basket of goods at a Tesco supermarket. Photographer: Simon Dawson/Bloomberg

Britons once bemoaned out-of-town superstores for sucking the life out of local shopping streets. Now a push by Tesco Plc (TSCO) and rivals to open smaller convenience branches in town centers is stirring a new round of angst.

“I rue the day Tesco came,” Alan Dean, a Liberal Democrat councillor, said of the Tesco Express that opened in 2010 in his southern England constituency of Stansted South. A lack of parking at the 2,100 square foot (195 square meter) store, across from a branch of the 93-year-old Dorringtons bakery chain, is choking traffic, Dean said.

The Stansted outlet is one of 150 convenience stores Tesco opened last year as grocers abandon the “big is beautiful” strategy. Carrefour SA (CA), credited with opening the world’s first big-box superstore in 1963, Wal-Mart Stores Inc. and Royal Ahold NV have all pushed into smaller spaces as consumers prefer to shop online and closer to home.

The “soulless sheds,” which can reach 100,000 square feet and sell tires, toys and shoes a few aisles from food, will “be a blip in the pages of retail history,” said Dalton Philips, chief executive officer of William Morrison Supermarkets Plc.

Cost-conscious consumers are favoring smaller, more frequent shopping trips over larger weekly purchases, according to Jon Wright, head of retailing research at Euromonitor International. High fuel prices are also reducing motivation to drive to out-of-town stores. The global convenience market rose 6.1 percent last year to $319 billion, or about 6 percent of total grocery sales of $5.37 trillion, according to Euromonitor.

Tesco Expansion

Tesco almost doubled its retail footprint from 2006 to 2011 to 103.6 million square feet as it opened about 500 outlets a year. In the same period, sales per retail square foot and earnings before interest and taxes fell 19 percent while inventory per square foot increased 15 percent and costs rose.

The U.K.’s largest retailer will give an update on its building and refurbishment plans on April 18. It will continue to focus on its online business with fewer large stores, Chief Executive Officer Philip Clarke said in January.

Specialist retailers with wider ranges and lower prices have made it difficult for hypermarkets to compete in non-food, according to Dick Boer, chief executive officer of Ahold, the Dutch owner of Stop & Shop groceries.

“The big boxes were hit twice,” Boer said. “The first time was at the time the category killers entered the market,” such as Metro AG’s MediaMarkt unit that offers bargain prices on DVDs, televisions and laptops. “The second hit, and this was a much harder one, was online development.”

Online Shopping

Online sales are the fastest-growing segment of the U.K. market, with grocery revenue expected to double in the next five years to 9.9 billion pounds ($15.8 billion), according to the Institute of Grocery Distribution. Britons spend one-fifth of their grocery money at convenience stores.

“People are doing their big shop online and they’re supporting that with top-up shops at their local stores,” said Natalie Berg, global research director at Planet Retail. “That kind of invalidates the whole hypermarket model.”

Wal-Mart (WMT) is experimenting with about a dozen “Express” small-format outlets to build a greater presence in U.S. urban areas and to defend against dollar stores in rural areas.

UBS has estimated that Wal-Mart could add about $80 billion in sales if it achieved a market share in 50 urban areas roughly equal to its share in non-urban markets.

Union Opposition

Wal-Mart’s attempts to enter markets like New York have been stymied due to opposition from labor unions and community activists, as well as difficulty in obtaining real estate. Wal- Mart operates smaller store banners outside the U.S., particularly in Latin America. The performance of some of those concepts, like Mexico’s Bodega Aurerra, has led Wal-Mart to export them to other countries, including Argentina.

“General merchandise will be clicks, not bricks,” Morrison’s Philips told reporters March 8. “Customers get a better range, better value and a superior shopping experience from the comfort of their armchair rather than a cluttered hypermarket.”

Morrison is limiting new stores to 38,000 square feet, with 50 convenience outlets planned for 2013. The Bradford, England- based grocer is spending an additional 100 million pounds on convenience stores and expanding non-food offerings online.

Jean-Charles Henri Naouri, CEO of Casino Guichard-Perrachon SA (CO), the French owner of Franprix and Leader Price stores, said discount or e-commerce formats will rule.

Not the Future

“We do not believe that the future of the French market is with the large hypermarkets,” he said. “There’s more value to be created by switching the marginal sales space to that of a shopping center” with multiple retailers under the same roof.

At Carrefour, the world’s second-largest retailer, superstores that account for about 40 percent of sales are the least profitable format.

Chief Executive Officer Lars Olofsson pinned the retailer’s future on a 1.5 billion-euro plan to revamp about half of its 500 superstores in western Europe. After upgrading 81 stores with wider aisles and more space for frozen food and fashion, the project was put on hold and Olofsson is leaving.

Still Noel Prioux, Carrefour’s head of France, said hypermarkets remain a legitimate format, with adjustments. Smaller hypermarkets close to urban areas will focus mainly on food, while larger, more remote outlets will devote more space to clothing and electronics.

“We were one of the first people in this business,” Prioux said earlier this month. “We didn’t get things right from the start, but I think that now, with our new organization, we can capture this new potential.”

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net.

To contact the editor responsible for this story: Sara Marley at smarley1@bloomberg.net


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