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The UK grocery market: ripe for disruption

4 December 2018
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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.

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3 minute read

grocery store

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.

References

  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

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Author

  • Jonathan Bayfield

    Director, European Real Assets Research and Strategy

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