3 minute read

With the grocery market undergoing significant changes, the successful supermarkets of the future are likely to be smaller and focussed on providing a rich shopping experience, writes Jonathan Bayfield.

Across the world, the supermarket sector is being transformed by shifting consumer tastes and technological changes.

In the US, for example, Walmart acquired e-commerce retailer Jet.com in 2016 and has announced tie-ups with Uber and Lyft.1,2 The company has also invested significantly in the Chinese online retailer JD.com.3 At the same time, Big Tech’s disruptive influence on the sector is undeniable. Amazon bought Anglo-American upscale grocer Whole Foods in 2017 and is searching for sites to roll out its check-out free store concept, Amazon Go.4 Google, meanwhile, has announced tie-ups with French multinational retailer Carrefour and Walmart.5,6

Elsewhere, UK online retailer Ocado has licenced its software internationally to Sobeys in Canada, Kroger in the US, Groupe Casino in Europe, ICA in Sweden and Morrison’s in the UK.7,8 In Europe, Carrefour announced a buying partnership with Tesco after it acquired 36 Eroski stores in Spain in 2016.9 In the UK, Sainsbury’s is likely to acquire a controlling stake in Walmart’s Asda, while Morrisons and Amazon have announced a partnership.10,11

A consumer-driven shift

Much of this change is being driven by consumers. They are increasingly shopping more often and buying less.12 They are also buying bulky, commoditised goods online; a trend driving demand at convenience stores. Against this backdrop, traditional supermarkets will have to significantly broaden their appeal and embrace technology if they are to enjoy success over the long term.

In the UK, further changes over the medium term should be expected via merger and acquisition activity and, more importantly, technology. As e-commerce grows, locating stores in places with a high footfall will be even more critical.  

With this in mind, UK supermarkets of between 20,000 and 40,000 sq. ft. are likely to prove successful. They can accommodate between 2,400 and 4,000 product lines; in other words, everything consumers need on a weekly basis. These outlets also have sufficient space to provide engaging in-store facilities, such as wine tasting and cooking lessons, coffee shops, bakeries and butchers. They are also able to use technology to boost the appeal of the shopping experience, as well as exploiting click-and-collect services.

Conversely, the outlook is bleak for very large supermarkets - those over 60,000 sq. ft. Those located in areas of low footfall, where the marketplace is already saturated, are particularly vulnerable. Technology and e-commerce threaten these outlets, given many of the products they sell are low-engagement items, such as soap, detergent and sanitary products, around which it is difficult to create an exciting shopping experience. Increasingly, these products are shipped directly from manufacturers to consumers. Moreover, the lack of credible alternative uses, such as residential development, means these outlets are particularly high-risk investments.

Impact on investment

The economic strength of a catchment area, including population and labour force growth, can help to predict the likely performance of stores as an investment asset. New developments, extensions or divestments in competing markets may attract shoppers and gain market share. In-depth knowledge of the local landscape, therefore, should be a key driver of investment decisions.

To be successful, supermarkets should be highly visible to customers and easily accessible by road.  Ample free parking and frictionless access are essential to ensure an enjoyable shopping experience and underpin the resilience of a supermarket asset.

Grocery retailing appears increasingly divided between those assets well placed to ride the waves of changing technology and consumer behaviour and those that cannot. Online competition for the delivery of bulky, low-value products is overwhelming the very large stores that once dominated the landscape. But more appropriately-sized smaller stores that can offer the convenience of the weekly shop and services and experiences that will attract shoppers out of their homes should prosper. In addition, very small convenience stores that are conveniently located and allow shoppers to make quick and frequent visits should also enjoy burgeoning demand.

 

Sources:

  1. 'jet.com acquisition anniversary' Walmart Press Release, September 2017
  2. 'Walmart, Uber and Lyft tie-up' Walmart Press Release, June 2016
  3. 'Walmart and JD.com' Walmart Press Release, August 2018
  4. 'Amazon Go’s strong appeal' Supermarket News, November 2018
  5. 'Grocery business changes for ever' CNN, August 2018
  6. 'Digital tie up between retailers and Google' Financial Times, June 2018
  7. 'Ocado’s international drive' Financial Times, May 2018
  8. 'Morrisons and Ocado tie-up' BBC News, August 2016
  9. 'Tesco and Carrefour join forces' just-food.com, July 2018
  10. 'Sainsbury’s-Asda deal' BBC September2018
  11. 'Morrisons-Amazon partnership' The Independent, May 2018 
  12. 'Changing shopping habits' The Guardian, November 2017
 
 

Important Information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (Aviva Investors) as at 12 November 2018. Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this document, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This document is not a recommendation to sell or purchase any investment.

In the UK & Europe this document has been prepared and issued by Aviva Investors Global Services Limited, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. Contact us at Aviva Investors Global Services Limited, St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Telephone calls to Aviva Investors may be recorded for training or monitoring purposes. In Singapore, this document is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited for distribution to institutional investors only. Please note that Aviva Investors Asia Pte. Limited does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Asia Pte. Limited in respect of any matters arising from, or in connection with, this document.  Aviva Investors Asia Pte.  Limited, a company incorporated under the laws of Singapore with registration number200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27-13 South Tower, Singapore 048583.In Australia, this document is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd for distribution to wholesale investors only. Please note that Aviva Investors Pacific Pty Ltd does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Pacific Pty Ltd in respect of any matters arising from, or in connection with, this document. Aviva Investors Pacific Pty Ltd, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000

 The name “Aviva Investors” as used in this presentation refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”).  AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606

RA18/1198/16112019