UK supermarkets: the epitome of retail resilience
Telling insights on the grocery market from KF’s foodstore lunch, indications of strong retail sales in January from BDO, Xmas figures from Poundland and FY results from Waterstones.
7 minutes to read
• Uncharacteristically positive figures from the BDO High Street Sales Tracker. Total like-for-like retail sales were up +7.0% in January, the strongest performance since January 2014. Non-store like-for-likes grew by +18.8%, but even store-based sales were ahead +5.7%. Always dangerous to read too much into one month’s trading (and January is generally one of the least significant months in the year as a whole), but curious that the media only seem to cover BDO’s High Street Sales Tracker when the numbers are negative (as they usually are)?
• Strong performance from Poundland over Christmas. Like-for-like sales increased by +1.3% during the three months ending December 2019. In common with many other retailers (most notably the grocers), the record trading day for the group was 23 December. The future ownership of the business is still up in the air. Embattled parent Steinhoff is seeking an IPO, although Advent International has reportedly teamed up with private equity firms Hellman & Friedman and Mid Europa Partners to launch a bid.
• The recovery continues at Waterstones. Pre-tax profits grew by +38% to £27.7m in the year to April 2019, compared to just under £20m the year before. In the absence of a ‘significant bestseller’, sales growth was a more modest +1.8% to £392m. Waterstones opened four new stores during the period, offset by five store closures, taking its overall store estate to 277 outlets across the UK, Republic of Ireland, Holland and Belgium.
Stephen Springham, Head of Retail Research:
Foodstores: next to no store closures, a return to site acquisition (albeit very selective, largely legacy projects and part of a wider process of churn), a pragmatic view on rents, expectations that the discounters are already beyond a crossroads and general apathy around the possible arrival of Amazon Go.
A brief summary of an in house lunch Knight Frank held last week with leading figures from the major UK food retailers. Held under Chatham House Rules, the results of the brief Survey Monkey nevertheless make for fascinating reading and provide a telling insight on where the grocery market is at the moment. To pick out some highlights:
When negotiating a lease regear, is it generally preferable to secure a. A lower passing rent b. A rent free period c. A capital payment?.
Complete consensus here between all nine respondents – a complete landslide on ‘a lower passing rent’. This clearly reflects a focus on long-term sustainability, rather than short-term quick wins. In marked contrast to non-food high street / shopping centre retail, that has for too long lived under the artificiality of rent free periods and capital contributions and is now counting the cost.
If rents were rebased to 100 today, where do you thing they will be in 2025 a. <70 b. 70-80 c. 80-90 d. 90-100 e. 100-110 f. >110?.
Differences of opinion, but a universal sense of pragmatism. 6 respondents anticipate further rent rebasing (3 respondents went for ‘80-90’, a further three for ‘90 – 100’), but the other 3 actually foresee a degree of rental growth (‘100-110’). No one anticipates a return to historic levels of rental growth, but equally, no one is predicting massive rebasing either.
What new term will foodstore retailers generally commit to: a. 5 years b. 10 years c. 15 years d. 20+ years?.
The majority (5) selected ‘10 years’, a further 3 went for ‘15 years’, the final one going long at ‘20+ years’. This again underlines one of the key differences between foodstore and high street retailing, the former still far more willing to commit to longer leases (and offering longer and more secure income for investors). Hypothetically posing the same question to 9 high street retailers, I would expect an overwhelming majority of ‘5 year’ responses.
When are we likely to see a return to “meaningful” new store development: a. Within 2 years. b. Within 5 years c. Within 10 years d. Never?.
Mixed responses, ranging from the encouraging (3 selected ‘within 2 years’) to the sobering (3 went for ‘never’). Answers hinged on the individual interpretation of the deliberately ambiguous term “meaningful”. However, there was consensus that we would never see a return to the ‘space race’ we witnessed in the past. Most foodstore retailers are still expanding, although very selectively and with generally smaller floorplates than before. Most larger foodstores in the pipeline are legacy projects that were previously put on hold, but are now finally seeing the light of day.
Which statement best sums up likely activity / priorities over the next two years? a. A return to ‘normalised levels’ of acquisition b. Very selective / opportunistic acquisition c. Portfolio management d. New openings offset by closures e. Complete inactivity?.
Endorsing the responses to the previous answer, no one opted for the two extremes of going back to normal and complete inactivity ‘Very selective / opportunistic acquisition’ was the most popular answer (4), but the reality is that for most this is part of wider portfolio management process. New openings would be offset by some store closures, but these would be very few and far between (which flies firmly in the face of alarmist headlines a few years ago that one in five supermarkets were facing closure).
Have attempts to downsize stores by subletting been a success?: a. Yes (on the whole) b. Not really c. Very hit and miss?.
A question to explore the success of subletting space in over-spaced big box superstores to 3rd parties. Interestingly, each option got 3 responses. The consensus of opinion was that it was easier and less cost intensive to reconfigure the space and reallocate ‘internally’ to other product categories than to carve off a dedicated unit and sublet to a 3rd party. The success of so doing was very location-specific.
Can anybody make online ordering/delivery a profitable business?: a. Yes b. No c. Only by radical overhaul of existing models?.
A fairly lukewarm response to one of the most contentious issues in retail. There were two responses of ‘yes’, though no one protested outright that online grocery already was profitable. The majority of respondents (6) opted for ‘Only by radical overhaul of existing models’. Which begs the obvious question as to why most of the operators persevere with something that is a drain on profitability. It was suggested that if all the grocery operators hypothetically sat down at a table and collectively decided to end online grocery retailing, they would. But as this unlikely to happen, no one is going to engage in unilateral disarmament and therefore the current status quo will be maintained.
The discounters’ share is currently ca. 13.7%. At what sort of levels do you think this share will start to plateau: a. 15% b. 20% c. 25% d. 30%+?.
The subject of much debate, but all respondents surprisingly went for the lower end of the spectrum (5 for ‘15%’, 4 for ‘20%’). Again, this flies in the face of constant media narrative and projections of certain retail analysts. To the outside world, this might smack of wishful thinking on the part of those present, but was qualified by considerable market insight. There was a degree of scepticism that the discounters would achieve their media-friendly expansion targets and there was a feeling that like-for-like growth was proving increasingly hard to come by, cannibalisation was rife and that they were struggling to make a profit in many of their stores in London and the South East. While still acknowledging them as a huge force in the sector, the consensus was that they are already in a more challenging phase in their evolution in the UK market.
When do you think Amazon Go will launch? a. H1 2020 b. H2 2020 c. 2021 d. 2022 e. Never?.
What of the other great ‘retail disruptor’, Amazon? Media speculation is rife as to when Amazon Go will launch in the UK. Only one of our guests went for ‘never’, a couple think later this year (‘H2 2020’), with 3 going for ‘2021’ and a similar figure for ‘2022’. But there was general ambivalence, an obvious mismatch between media hype / coverage and actual market reality. Very little evidence of the “major grocers trembling with fear” as some in the media have suggested.
A sector that has been through the mill, faced up to its challenges, embarked on a voyage of self-help and is now plotting a pragmatic path towards a long-term, sustainable future. Why the foodstore market remains one of the most durable and investible parts of the UK retail sector.