C-Stores: Competitive, consolidating and churning
Changing consumer patterns have certainly played into the hands of the convenience store market, but it is still ironic to hear talk of the ‘convenience revolution’ says Andrew Thatcher, Partner in Knight Frank's Foodstore Agency.
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C-stores are in fact the oldest form of grocery retailing in the UK, predating supermarkets and superstores. But it is a market that continues to change, particularly in the wake of the Tesco/Booker merger.
The c-store model is fundamentally very different from that of supermarkets and superstores. C-stores cannot simply be scaled down versions of big boxes. For obvious reasons, the product range has to be heavily edited, not just to respond to the everyday needs of a smaller catchment and passing trade but also to achieve the right margin mix.
A c-store won’t make much (if any) money on c-store essentials such as milk, alcohol and cigarettes, but it needs to stock them. But it will make much more margin and money on products such as ready meals, fresh and food-to-go.
Achieving the right product mix to counterbalance a higher cost base is the fundamental skill of a successful (and profitable) c-store. Despite high top-line growth, c-store retailing is anything but a gimme. Although less capital intensive, the actual cost base is proportionally much higher.
"Morrisons’ failure with M-Local and the fact that Asda’s small scale supermarkets are reportedly the only unprofitable part of the business underline the challenges of making a success of the c-store channel."
More stores are leasehold and rents are usually £20/sq ft+, sometimes £30/sq ft+. Staffing costs are also proportionally higher and c-stores are therefore much more sensitive to upward movements in the Minimum and Living Wage. Lacking the economies of scale of superstores, profitability in c-stores can be far more hit and miss.
Morrisons’ failure with M-Local and the fact that Asda’s small scale supermarkets are reportedly the only unprofitable part of the business underline the challenges of making a success of the c-store channel.
There could potentially be some c-store closures, particularly ‘first generation’ sites that have been trading for over ten years
That said, a number of operators are still actively acquiring new c-store sites, principally Tesco, Sainsbury’s, the Co op and M&S. The Co op plans to open 100 c-stores this year alone (including 20 in London) as part of a wider £160m investment programme.
M&S had originally planned to open a further 200 Simply Food outlets (company-owned and franchised) by 2019. However, these plans have since been revised downwards.
Nevertheless, it remains committed to opening a further 36 c-store sites in the first six months of this year. Sainsbury’s current annual ‘run rate’ for new Sainsbury’s Local stores is c.25.
As for Tesco, the merger with Booker will add over 5,000 new Family Shopper, Budgens, Premier and Londis sites to the existing 2,700+ strong Tesco Express and One Stop Network.
There will inevitably be some organic expansion as well, but this will be buried in the midst of the integration of the various businesses. But with maturity and consolidation comes a possible degree of natural churn and fall-out.
While we are confident that that grocery big box closures will be very few and far between going forward, there could potentially be some c-store closures, particularly ‘first generation’ sites that have been trading for over ten years.
Unlike superstores, many c-stores have a finite lifespan, before they are supplanted by better located or better configured, newer units. C-stores are also very susceptible to competitor impact.
It would be wrong to interpret any c-store closures as a sign of malaise or failure. It is the natural order of progression and is churn rather than retrenchment. For every three or four closures, we are likely to see around 10 new openings. There will be a net gain in store numbers going forward, albeit at a decelerating rate than we have seen in previous years.