Foodstores: Paradise Regained?
Knight Frank’s latest Retail Research Report on the UK grocery market, Q1 figures from Sainsbury’s, a full-year trading update from Superdrug and taking stock of John Lewis’ “zero profits” bombshell and putting this into context for House of Fraser.
4 minutes to read
- Sainsbury’s like-for-like sales, excluding fuel, grew 0.2% in Q1 (16 weeks ended 30 June), a slowdown on the 0.9% posted the previous quarter. Total retail sales grew 0.8%, with grocery sales ahead by 0.5%. Groceries online and convenience were up 7.3% and 3.6% respectively, as the Group extended its same day Groceries Online delivery to 171 stores (covering 57% of UK households) and opened one new c-store. General merchandise sales grew by 1.7% and clothing sales grew by 0.8%. During the period, Sainsbury's opened 37 Argos stores in Sainsbury's supermarkets, bringing the total to 228.
- Strong full-year figures from Superdrug. The health & beauty retailer posted a 41% increase in pre-tax profits and 10.4% rise in revenue to £1.2bn for the 53 weeks to 31 December 2017. Like-for-like sales were also up 7.8%. Among the strongest performing categories were cosmetics (+14%) and health and wellbeing products (+12%). During the year, the business opened 23 new stores and invested £33m into store refurbishments.
- John Lewis confirming that first half profits will be “close to zero” sent further shockwaves through the retail industry, but this largely reflects the cost of future-proofing the business. JLP’s pledge to maintain investment at a rate of £400m-£500m a year shows just how paltry HoF’s new owner’s’ reported £70m one-off commitment is. JLP’s decision to close five Waitrose stores also needs qualification – all are Little Waitrose c-stores and all are transferring to other operators (Aldi and the Co op) rather than closing outright.
Stephen Springham, Head of Retail Research:
A rare thing – a good news story in retail. But that is exactly what the UK grocery market is, as we explore in depth in our latest Research Publication ‘Foodstores: Paradise Regained?’
Sentiment is everything. And few sectors epitomise the fickle nature of investor sentiment than supermarkets. Having previously been one of the darlings of the property investment market, foodstores witnessed a dramatic fall from a grace from 2014 as the well-documented travails of the ‘Big Four’ bit hard.
The narrative around foodstores is again becoming increasingly positive. The market has returned to sustainable growth, albeit with a number of inflationary challenges. Serious soul-searching and implementation of dramatic self-help strategies has seen the ‘Big Four’ stage a recovery that many thought unlikely.
These journeys are now plotting a new course in the wake of game changing industry consolidation in the shape of the mergers of Tesco / Booker and Sainsbury’s / Asda. The ramifications of both of these deals are explored in depth in the report.
Despite general market recovery, a number of key challenges remain and structural change is still playing out. The discounters continue to expand aggressively and build market share, but they too face their own challenges going forward, not least inevitable trading cannibalisation.
The convenience store market is likewise poised for radical shake-up in the wake of the Tesco / Booker merger and the Co op’s takeover of Nisa. Online grocery continues to grow, yet profitability, if not elusive, remains unproven.
In the meantime, ‘big box’ supermarkets and superstores continue to represent the mainstay of UK grocery retailing. Reports of their demise were not just premature, they were patently wrong.
For all the market’s trials and tribulations of recent years, a number of key factors have often been overlooked. As property assets, foodstores have extremely strong fundamentals.
Although the new store development pipeline has slowed to little more than a trickle, very few established supermarkets will actually close and there is a very strong likelihood of lease renewal.
Whereas the previous ‘foodstore gold rush’ was predicated on perceived rental growth, the attraction in now long income let to strong covenants, often at a discount to other property sub-segments.
Dynamic, fast-changing and cut-throat. Complex, but fundamentally robust. There is never a dull moment in the UK foodstore sector. The recovery is a sustainable one and the real estate investment case is a compelling one.
Back in 2014, the foodstore market was seemingly on its knees. The space race came to an abrupt halt, negative market growth saw the ‘Big Four’ all haemorrhage sales and market share and just when things couldn’t get any worse, they did, with a string of scandals ranging from accounting to horsemeat. From its lowest ebb, the grocery market has slowly but surely got back on the road the redemption.
Hope for the rest of the high street, supposedly on its knees in 2018?