Adapt or die
Is Tesco's 'stores within stores' experiment the shape of things to come after all the large chains reported poor sales during the festive season?
THE poor Christmas trading figures from almost all the supermarkets demonstrate the scale of the problems facing the big food retailers. With consumers increasingly shopping around, buying "little and often", is the traditional large supermarket now obsolete?
In the UK, Sainsburys reported its fourth-quarter sales, which include the all-important Christmas period, on January 8.
Delivering the numbers, chief executive Justin King boasted that his company had beaten the market with an ... er, 0.2 per cent increase in like-for-like sales.
A day later it was the turn of Tesco, M&S and Morrisons to report their Christmas results. If the Sainsburys figures were merely underwhelming, then those from some of its rivals were much poorer. While like-for-like sales were down by "only" 0.2 per cent at M&S, they fell by 2.4 per cent at Tesco and by 5.6 per cent at Morrisons.
These sales figures would almost certainly have been even worse if it hadn't been for the roll out of smaller convenience store formats by the UK retailers, with Sainsburys reporting an 18 per cent increase in sales at its convenience store format Sainsburys Local. Tesco has also gone down the convenience store route, with 1,500 Tesco Express outlets in the UK and 30 in the Republic of Ireland.
Unfortunately, with the exception of SuperValu owner Musgrave, detailed financial information is not available on either the Irish-owned retailers or the Irish offshoots of foreign-owned retailers.
However, even on the basis of what we do know, it is clear that they are experiencing many of the same problems as their UK counterparts.
Last month Tesco revealed that third-quarter sales at its Irish business had fallen by 8.1 per cent. The fall in sales at Tesco Ireland comes at the same time as the German discounters Aldi and Lidl go from strength to strength with their combined Irish market share touching 15 per cent.
So is the game up for the 50,000-100,000sq ft, giant supermarket that consumers have grown accustomed to in recent decades?
"The trend Europe-wide has been away from monster supermarkets. We have always argued that they would ruin our city and town centres.
"Consumers are moving away from that kind of shop and are finding that they can get everything they need in a 20,000 square feet store," says Martin Kelleher, managing director of SuperValu which has a 19.5 per cent share of the €9bn Irish grocery market.
There has been a major change in shopping habits in recent years. As the recession has bitten deep into disposable incomes, consumers have become more savvy. Instead of buying everything in a single weekly "trolley shop", they are making more but smaller shopping trips. Recent research conducted for the National Consumer Agency by Kantar Worldpanel found that the average household makes more than four-and-a-half shopping trips every week and that the average spend per trip is just €22.
Consumers have also become less loyal to individual retailers with four-fifths of them shopping in more than one retailer every week. When the shopper does cross the retailer's threshold, he or she is likely to "cherry-pick" individual items, Kantar estimates that private-label now accounts for more than 37 per cent of the grocery market by value and that 14 per cent of all grocery items are now sold on some sort of special offer or deal.
"There is the hassle of getting to a hypermarket-type store. Then, when the shopper gets there, the value is not what it seemed to be. There is also the cost of the petrol it takes to drive to and from one of these stores", said Leo Crawford, chief executive of BWG which owns the Irish Spar and Mace franchises.
Tesco begs to differ.
"No, it [the large supermarket] is not obsolete. Stores over 50,000 square feet continue to be part of our strategy. However, the vast majority of the stores in our portfolio are under 50,000 square feet and tailored to suit the needs of their local community," said a Tesco spokesperson.
However, while Tesco is not giving up on the giant supermarket it is trying to re-invent it and is trialling a new format at Watford in the UK. Instead of the traditional hypermarket layout of miles of aisles, the 80,000 square feet store, which opened in August 2013, features a series of "stores within stores" including a Giraffe restaurant, Harris + Hoole coffee shop, Euphoriom Bakery outlet and an F&F clothing store.
Some of Tesco's Irish stores are also getting a makeover with pharmacies, dry cleaners and coffee shops among the new attractions for shoppers. By revamping its larger outlets in this way Tesco is seeking to create "retail destinations". Tesco will be hoping that this facelift works as its market share has fallen by 1.9 per cent to 26 per cent over the past year.
"During mid-week we are convenience-based consumers. We shop and then come straight home. At the weekends we turn into experiential consumers. We are looking for a day out," says David Fitzsimons, the chief executive of Retail Excellence Ireland. Mr Fitzsimons points to the relative success of what he calls "destination venues" such as Dundrum Town Centre, Kildare Village and Avoca Handweavers in recent years to support his contention.
At the same time as the old-style "big box" supermarket is having to reinvent itself in order to survive, reports of the demise of the big weekly or fortnightly "trolley shop" may have been slightly exaggerated.
"There is still a need for the full trolley shop. It still suits a lot of people", says Mr Kelleher.
While the increased number of shopping trips being made by shoppers may have brought down the average spend per trip, "the majority of the spend is still going through the bigger stores", says Kantar Worldpanel's commercial director David Berry.
He believes that the recession accelerated certain consumer trends, such as the rise of own-label and the increased proportion of sales being made on special offer, that were already under way.
Instead of disappearing entirely, the traditional "big box" supermarkets will have to mutate. Tesco's Watford store, or something very close to it, probably represents their most likely future. This will tend to favour newer, better-located shops; while older, less well-located supermarkets are likely to find the going increasingly tough.
Although the big supermarket is likely to survive in one form or another, its previous unchallenged dominance of the grocery market is at an end.
With cash-strapped consumers constantly seeking out better value and being increasingly promiscuous in their choice of retailer, the future is set to be one of outlets of all shapes and sizes, both on and off-line, competing fiercely with one another.
"Consumers will continue to demand choice: there will be shopping trips where consumers will want to shop at larger scale outlets and there will also be shopping trips where they will want to shop smaller format stores. The choice will always have to be there in order to satisfy consumer demand," according to Donald McFetridge, retail analyst at the University of Ulster's Business School.
SuperValu's Mr Kelleher foresees what he describes as an "omnichannel" future that will include a role for the traditional shopping trip as well as online and mobile phone shopping where customers' orders are either delivered to their homes or collected by them from the store.
"There are opportunities for smaller players if you can offer value, the right customer service, convenience and a good private label range.
"However, the market is going to remain extremely competitive," says Mr Crawford.
"So long as a format offers value then it has a future. Any format that does not offer value doesn't have a future," is the blunt assessment of David Lynam, director of IBEC's Retail Ireland offshoot.