No-frills food traders are making the superstores very nervous. Peter Wilsher considers whether such fear if justified.
Britain's grocery bill this year will be somewhere in the region of £57 billion. Almost two-fifths of this now passes through the tills and checkouts of just three companies, Sainsbury, Tesco and Argyll (the parent of Safeway and Presto), which, for decades, have been steadily honing their management skills, slowly but inexorably improving their profit margins and extending their grip on the nation's housekeeping money. Throughout the recent recession they have continued to expand, refurbish and open new outlets, with an ever more dazzling and varied array of products and services. But suddenly doubts have set in. The stock market is awash with fears about capital spending, market saturation, the real, long-term value of all that glittering real estate, the impact of a new, fast-growing breed of deep-discount, no-frills food traders and, above all, about the possible outbreak of a cut-throat price war.
In the first nine months of 1993, while most shares quoted in London were rising to all-time peaks, the prices for these three stocks, on average, dropped by almost 30%. Then, after a brief recovery in October, came the news that they had failed in a joint High Court bid to block the British invasion plans of Costco, the most aggressive of the super-discounting US warehouse clubs. The City responded by knocking a straight £800 million off their collective market capitalisation almost overnight; and worse was still to come. In November, Sainsbury announced that tightening competition had persuaded it to cut prices on no fewer than 300 of its basic own-label products. The resulting jitters, which happened to coincide with a near-global 'correction' in equity share levels overall, promptly trimmed the big grocers' own joint market price-tag by a further £1.2 billion. So was Archie Norman, the chief executive of Asda - one of the most respected of their rivals - right when he warned earlier this summer that 'the halcyon days are over'?
It is not hard, particularly in the south of England, to collect what appears to be good anecdotal evidence of over-saturation. Within easy walking distance of my own front door in north west London there is a Safeway, a large Sainsbury and what turned out to be the prototype of Marks and Spencer's all-food stores. Five minutes driving adds two more Safeways, a second Sainsbury, a Gateway, a John Lewis's Waitrose, and an Eastern Electricity depot site where Tesco plans to join battle next year. And extending the radius by an extra couple of miles brings in several more of the same, plus at least three additional Tescos and an Asda. Where do all the customers - who clog up the aisles with their trolleys and make bill-paying a time-wasting agony - come from?
To answer that, and assess its relevance - if any - to the future of the leading UK food retailers, it is necessary to delve deeply into the geographical and competitive realities of what is both an immensely complex and a little understood area of business activity. There can hardly be a more diversely-served sector of the economy - the players range from the immensely strong to the weakest of the weak. Any generalisation based on superficial perceptions is almost certain to be wildly wrong. In many of Britain's 2,600 postal districts, for example, it is tempting to believe that there is already an established superstore on virtually every significant street corner. For some places this is almost literally true - at Sutton, in Surrey, close to the core of the Sainsbury heartland, and at Stevenage, on Tesco's corporate doorstep, these two, together with Safeway, now control well over 40% of all the available selling space and are probably responsible for close to 70% of all the produce and household cleaning equipment sold locally. That is true saturation (though even there the rivals have so far been able to co-exist without much visible sign of cut-throat price-slashing). But this is very much the exception. In a fascinating piece of research carried out by the City stockbrokers Henderson Crosthwaite, the country is divided into six divisions, according to the share of its food trade accounted for by the Big Three. Division One, headed by Sutton and Stevenage and including such predictable entrants as Milton Keynes, Bournemouth and Croydon, covers the 14 postal towns (all, barring Hereford, in the affluent South and South East) where concentration exceeds 35%.
But many similar-seeming places, like Reading, Cambridge, Guildford, York, and indeed my local London borough of Harrow, fail to make it into this over-stuffed top-echelon. They are all in the 25%-35% concentration band, and presumably therefore still offer some scope for further Big Three colonisation. Below this, the density starts thinning out rapidly, and there are real surprises, especially in Group Six, where the majors have so far achieved penetration of less than 10%. This includes not only such relatively stony ground as Oldham, Galashiels and the west central district of London but also potentially mouthwatering high household-income targets like Telford, Harrogate and Torquay. All this serves to back up the observation of one senior industry executive who, in a leading trade magazine, recently dismissed suggestions that Sainsbury might be running out of steam, pointing out that although the company now handled something like 40% of all the food sold in Greater London, its national share was still only one-sixth, while something like a third of UK families were still beyond realistic reach of any Sainsbury store.
This helps to explain why the Sainsbury chairman, David Sainsbury, and his opposite numbers, Sir Ian MacLaurin at Tesco, and Sir Alistair Grant at Argyll, are still pressing ahead so confidently with their ambitious investment programmes. Between them they have announced plans to open 6,190,000 square feet of additional sales area in the three years to the end of 1995, which adds up to around 185 new stores.
It is this relentless flood of new capital spending that has attracted much of the critics' fire. With new superstores regularly coming in at around the £40 million mark (and Safeway is believed to be spending £7 million more than that on its latest project, commanding the western approaches from Glasgow to Edinburgh) there is widespead scepticism as to whether the money can ever repay itself - especially now that the rock-bottom discount operators are starting to establish a real foothold in many parts of the market.
It was Archie Norman who first highlighted this threat. In a wide-ranging survey of the industry and its problems he focused particularly gloomily on the £2 billion-worth of new outlets currently under development - mainly by the Big Three, plus Kwik Save, the 800-shop discount chain, Iceland - which is branching out aggressively beyond its original speciality, frozen food - and the Yorkshire-based northern multiple, Wm Morrison, which has been one of the strongest second-tier performers. Asda itself has just two new major developments currently in the pipeline - partly because it is only now recovering from the disastrous 1989 decision, by a previous management, to spend £600 million buying a clutch of former Gateway stores. But just as important a reason for throttling back, Norman implied, was the current competitive situation, with ever more shops chasing a more or less static customer base at a time of clearly eroding margins. 'ln our own catchment area alone,' he said, 'we shall soon see 80 new discounters, 75 superstores and six warehouse clubs.' Initially such observations were treated rather dismissively by other industry leaders. David Sainsbury, for exmple, went out of his way at his summer 1993 AGM to reassure shareholders that there were still many profitable opportunities to open new branches and find better ways to serve the customer. 'It is indisputable that retailers who have a preponderance of of older stores and few new ones in prospect will feel they have a position of overcapacity,' he said, and then briskly added, 'We are not in that vulnerable position.' Where he now acknowledges real vulnerability, however, is on the central matter of price - hence the current drive to promote the 300 Sainsbury 'Essentials'. 'Anyone who said there was not an issue about discounters, about warehouse clubs, about how far such development can go, is not living in the real world,' he warned, while unveiling his company's still excellent interim profits (up 11% to a record £434 million in the 28 weeks to end-September). But he is determined that there must be no panicky over-reaction. 'Our response', he promises, 'will be to press home our advantage by improving both price competitiveness and quality.' Sainsbury speaks from a position of very considerable strength. On the latest published figures it stands right at the top of the tree when it comes to the crucial measure of operating profit per given area of selling space. It returns 9.19% on sales of £922 per sq.ft giving a yield of £84.70. To put that in perspective - the equivalent amount that Gateway manages to extract from one of its cut-price Food Giant outlets is only £4.45. And the Sainsbury achievement, it must be remembered, is just an average. There is little doubt that the best and newest of its stores (like those of both Tesco and Safeway, as well as the deliberately high-priced M and S food centres) are producing more like £140 per sq.ft.
At that level, of course, the arithmetic of a £40-million, 45,000-sq.ft superstore starts to look distinctly more attractive. It works out at a capital investment of £670 per sq.ft, with the prospect of paying it off in just under five years, and everything thereafter counting as pure profit - for at least 10, and more probably 15 further years. That is why Sainsbury still plans to go on adding between 20 and 23 new supermarkets a year to its already formidable chain. But for the first time the chairman has admitted that these are no longer likely to produce the same sales growth as they have done in the past. To keep up the business's growth potential, he now predicts, it will be necessary to switch more of the focus to other areas, like the 10 Savacentre hypermarkets and towards increased expansion overseas.
There is a great deal of difference, though, between planned deceleration and redirection, and the kind of discount-driven profits collapse foreseen by the more pessimistic City analysts. When a Safeway loaf costs 71p and Aldi, the German-owned discounter which is starting to spread southward from its initial Midland base, charges only l9p there is little question (other things being equal) which customers are likely to prefer. But things in the grocery trade are rarely equal. And even if they were, it is far from certain that the Big Three, with their massive reserves of capital, experience, and above all market information, would be the first victims.
The first thing to remember is that, even after 40 years of serve-yourself supermarketing, there are still some 20,000 small independent grocers in Britain and another 35,000 small specialist traders - greengrocers, dairies, butchers, fishmongers and the like. Together with the almost crippled Gateway (virtually dead in the water since the hugely misjudged Isoceles buy-out in 1989) and to a lesser extent the Co-ops, these two groups have given up almost all the £6 billion of extra turnover which has flowed into the coffers of the quoted giants in the past five years. But collectively they are still larger than Sainsbury, and enjoy a market share matching that of Tesco and Safeway put together. They will almost certainly provide the first and softest targets if the discounters go seriously on the warpath. That day, however, may be somewhat further off than the more nervous commentators fear. There is no question that the bare-bones discounters represent a genuine threat - the Danish-owned Netto chain regularly comes out best in the quarterly standard-shopping basket surveys carried out by the Verdict Research oganisation, with £30.75 in July, against £31.23 for Ed (owned by the French Carrefour group), Kwik Save at £31.61 and Aldi, seen as the most dangerous of all the interlopers (until Costco opens for business) at £31.66.
But perhaps more significantly, the gap between the typical discount basket and the typical superstore basket, which Verdict also monitors and which had stood at a fairly gaping 12% in September 1992, had shrunk to 6% by July 1993. Indeed Sainsbury claims that 150 bestselling own label lines are already as much as 23% cheaper than the comparable branded goods sold by Kwik Save. On that basis it reckons it is competitive enough to retain the loyalty of all but the most penny-pinching of customers - even if they were realistically in a position to chase the best bargains on the market.
As yet, very few are. Aldi and Netto between them have, at the moment of writing, only 100 shops between them, almost all concentrated in the Midlands and the North, while Ed, which, very interestingly, has chosen to probe the cost-consciousness of the hitherto rather sniffy South East, has so far opened only one outlet, at Maidstone, with another two, Bexleyheath and Peckham, in the pipeline. Isle of Man-based Shoprite shows very combative tendencies but is so far virtually unknown outside Scotland and Man, and Kwik Save, though now theoretically accessible to half the UK's shopping public, has not managed to sell itself to more than 25% of them. That has to be compared with Aldi's enormously successful parent which is now reckoned to serve, either regularly or occasionally, some 91% of all German consumers. The contrast has to raise a real question about the susceptibility of the British housewife to bulk buying from cardboard boxes in basically warehouse conditions.
It must also cast a shadow over the prospects for warehouse clubs proper - despite the positive hurricane of publicity and dire prognostication (largely generated by the Sainsbury-Safeway-Tesco bid to stop them). Non-existent 10 years ago, these clubs now represent a $2-billion-a-year business in the US and Canada, and the two leading concerns, Costco and Price Club, are both set to expand in Britain, now they seem to have overcome the legal and planning hurdles put in their way by our own supermarket giants. These are essentially cash and carry operations, offering goods at extremely discounted prices to anyone who can beg, borrow, steal or otherwise qualify for a 'membership card'. Littlewoods has gone into partnership with Price Club, while Nurdin and Peacock, a UK wholesaler which faces drastic shrinkage in its traditional trade of supplying the UK independents, plans to follow the same route, and Costco is about to test the water with a 136,000 sq.ft unit (plus 800 parking spaces) alongside the Lakeside shopping complex at Thurrock in Essex.
This is patently creating a high degree of boardroom concern (especially when American commentators like the Wall Street Journal are heard gloating that 'those Brits just don't know what discount really means'). But again it is useful to put all this activity into some kind of scale.
The crucial considerations have been set out cogently by Henderson Crosthwaite's senior retail analyst, Bill Myers. 'Grocery competition is a local matter,' he says. 'If two large food shops are more than about six or seven miles apart then they might as well be a thousand miles distant.' In these circumstances it is misleading to suppose that price differences are transmitted instantaneously throughout the system like electricity through the national grid.
There are two points to be made about that. First, the new foreign-owned discounters are very thin on the ground and have shown no inclination, so far, to accelerate their speed of spread. Also they are, surprisingly, concentrated usually in blue-collar, low-income areas. In north west Nottingham, for instance, you find Kwik Save, Food Giant and the local Co-op sharing a single car park in Bulwell, with Aldi just up the road in Hucknall on the site of a redundant coalmine, and Netto a short distance to the west, in Langley Mill. With the solitary exception of a small, rather elderly Safeway in Eastwood, the only people they compete with are themselves. Even in that microcosm, though, the Safeway manager is hardly without weapons. Thanks to the immense investment made by all the majors in Electronic Point of Sale technology (EPOS) it is possible for him to assess, within seconds, the impact of any particular price cut or promotion launched by his rivals - and respond accordingly. And, of course, the competition is hardly like-for-like. No discounter yet carries more than about 2,000 different lines, and Netto, a truly bare-bones contender, has just proudly announced a rise from 600 to 650. Warehouse clubs are even more selective (and in any case food is quite a small part of their operation: hardware and electrical goods are far more important). No self-respecting outlet of the Big Three, however, would dream of displaying fewer than 10,000 different items, and in major branches that rises to 20,000 or more.
That does not mean that the big chains can afford to be impervious. Most of them (even M and S) have now gone some way down the road pioneered by Tesco Value, where 70 basic items are regularly offered at prices well below even those attached to the store's regular own-brand label. Sainsbury is now energetically following this with its Essentials. But the flexibility offered by EPOS whereby prices, offers, promotions, ordering patterns, even shelf displays can all be altered almost minute by minute according to the way demand is moving, gives them an enormous advantage. Most of even the established competition is miles behind - the well-regarded Waitrose, for example, is only installing its first 'smart tills' at this moment, and will not complete the programme until 1995, while Aldi's check-out girls are still required to learn the list of current prices by heart.
Price, in any case, is only one component in competition. The sheer range of one-stop services now offered by the superstores puts them in a totally different league to the more or less one-dimensional grocer's shop. The Big Three, plus Asda, now operate more than 500 petrol stations between them, and account for approaching 15%of Britain's auto fuel sales. Similar percentages apply to both beer and wine and pharmaceutical products (so that Superdrug and the off-licence chains may be competitively more significant than the food discounters). Other new dimensions are constantly being explored. Flowers, plants, newspapers, even dry-cleaning services are becoming almost commplace. Restaurants and coffee houses are sprouting up everywhere. Tesco and McDonald's are looking into the possibility of a fully-fledged franchise arrangement. Elsewhere, similar alliance discussions are under way with both Boots and Post Office Counters.
Meanwhile the basic costs of new store-development are showing a gratifyingly downward trend. The average cost of site acquisition and development is believed to have dropped in the past year from £20 million to £16 million, while improved distribution technologies allow an alert operator like Sainsbury to get as much selling space out of 20,000 square feet as 25,000 would have provided even a couple of years ago. Even staffing costs, already pared to the bone, may prove to be further cuttable when the first fully-automatic check-out, developed by a company called Uniquest Europe, goes on test next year.
As for price itself, its importance obviously cannot be ignored. But it needs to be put into context. At Yoakan, the new £45-million Japanese shopping complex in Colindale, north London, a single rare mushroom is marked up at £45. But then, Yoakan's target customer is the expatriate housewife, homesick for Tokyo, with what research has discovered to be a £3,000-a-year grocery allowance to play with. Not much scope for Aldi and Netto there.
The Big Three may not be quite so well insulated as that, but their in-depth defences look unlikely to crumble quickly, even under a barrage of Costco's 'unrepeatable value' baked beans. In fact the main significance may well be to prolong the life of the much-threatened corner grocery shop, which is likely to get its supplies substantially more cheaply from a warehouse club than from a traditional wholesaler. Meanwhile, reports of Sainsbury's imminent demise can safely be regarded as premature.