Supermarkets To Go Local As Tesco Results Show Weakness Of Big Box Model
The march of the megastores could be slowing, as poor results from Tesco, the UK's largest retailer, show the weakness in the big box, out-of-town model, analysts said.
Tesco reported its worst Christmas in decades on Thursday, issuing a profit warning as like-for-like sales fell 2.3%, compared to the previous years. The company indicated that it was to invest in reorganising its stores, and to rein in the expansion of its out-of-town portfolio.
Analysts said that online and mobile shopping, tightened household finances and higher fuel prices are contributing to a weakening of the appeal of megastores. In response, food retailers will increasingly have to push into the convenience sector, while their non-food offerings migrate online.
Specialist non-food retailers in sectors such as clothing and electrical items have been seeing their business go online for the past few years, David Gray, UK retail analyst at the research consultancy Planet Retail, told the Huffington Post UK.
While Tesco struggled, Sainsbury's had a relatively strong festive season, a fact that is partly attributable to the size and success of their non-food ranges, according to Gray. Out-of-town Tesco stores have typically set aside large areas for their growing clothing ranges and other products. That has been, and will remain, a drag, as that part of the business goes the way of other retailers.
"This general shift for non-food online has been going on for some time, and the acceleration of mobile commerce means that consumers can compare prices online, they can go into the store, they can browse products and they can compare them with their phone and go and buy online," Gray said.
"I think generally the shift will be more non-food going online and big hypermarkets having a good quality food range with more complementary non-food. The difference between Sainsbury's and Tesco is that Sainsbury's was coming from a relatively low base on non-food so they are still looking to put more non-food into their stores, whereas Tesco is a lot further along in the process, they've got a much bigger footprint."
Gray believes that there is a lot of scope for Tesco to build out its online clothing retail business, to compete with other clothing retailers who are struggling on the high street. The growing use of "click and collect" services is also a sign of how customers might use out-of-town outlets in the future.
At the same time, food retailing is going local. Tesco and Sainsbury's have aggressively expanded into the convenience sector with their Express and Local brands, respectively. Morrisons has opened a small number of trial convenience stores in the north as it prepares to enter the market.
"We're seeing people move away from doing a weekly shop in an out-of-town centre to doing an online shop and then topping that up in a local store," Cliona Lynch senior retail analyst Verdict Research, told the Huffington Post UK. "That way they can control their spending better and reduce waste as well."
Morrisons has a potentially competitive offering, Lynch said, as it chooses to focus on fresh food, using its larger stores to supply multiple daily deliveries of fruit, vegetables and meat to its smaller outlets.
Tesco and Sainsbury's entered the convenience store market off the back of petrol forecourt deals with Esso and Shell, respectively.
"Morrisons has got to do it off its own back, and times have changed," Gray said.
However, he noted, there is still a lot of room for manoeuvre in a market that is largely unconsolidated, with thousands of independent convenience stores across the country.
"I think it's the last big opportunity, convenience," he added.