Over the past few years, they have watched their margins shrink in the face of the three-pronged onslaught by online retailers, the discounters and the convenience format. Footfall at their once all-conquering big-box, out-of-town stores has slumped to a fraction of what it once was and said stores now look far too big for their requirements following range reviews that have led to swingeing cuts to their non-food products.
The race is now on to reconfigure the remaining stores to fill this excess space, either by offering concessions or subletting to other operators with complementary offers. Essentially, what’s happening is the next phase in a store rationalisation process. The first phase saw them stop opening new stores. Then they started offloading surplus ones. Now they are looking at their existing trading formats and working out how they can optimise the space they occupy.
So far, the big four have done deals with gym operators, fast-food chains, fashion retailers and camera shops. But are they really cut out to act as landlords to other retailers? Which retailers should they be targeting? And is it better to sublet or go down the concession route?
At the moment, there are subtle but distinct differences in strategy. “All of the big four are trialling different initiatives to see what’s going to work with their excess space,” says Chris Keen, senior director of retail at CBRE. “What they’re looking for is complementary uses to drive footfall and sales. Once they’ve found which ones work they will roll them out further.”
Some are further down the line than others. The retailer that faces the biggest challenge has arguably made the biggest inroads. Tesco bought restaurant chain Giraffe in 2013 and earlier this year bought out the owners of the Harris + Hoole artisanal coffee chain that it originally held a minority stake in - it has already added a number of Giraffe and Harris + Hoole units to some of its superstores. Last year, the supermarket group also announced deals with Sports Direct and Peacocks to set up ‘shops within shops’ in two Tesco stores in Hungary as part of a trial. Later in the year, it sealed a deal with Arcadia to open outlets of the group’s brands Dorothy Perkins, Evans and Burton in selected UK sites.
Tom Edson, director - out-of-town retail and leisure at JLL, says the Arcadia deal makes sense because it allows Tesco to draw on a shopper demographic that is slightly different from those who currently shop its standard clothing range. “But you have to think about this deal from both sides and look at which Tesco stores can accommodate Arcadia brands without them having a significant impact on sales of Tesco’s own goods, and Arcadia will want to make sure this won’t affect sales in its standalone stores,” he cautions.
It is something Sainsbury’s has also had to consider, when brokering agreements with the likes of Jessops, Timpson and Argos for shops within shops in its larger stores. It revealed late last year that 6% of its floor space was being underused.
“Half of this space they think they can fill themselves with concessions and the other half is going to require third-party subletting to the likes of Argos and Jessops,” says Keen.
Sainsbury’s has also been filling space through deals with a national dental practice, which appears to be a good fit, says John Witherell, head of the supermarket agency and development team at CBRE. “Most big stores are in easy places to get to and most have lots of free parking so if you can tap into other services that people need, such as a trip to the dentist, then so be it,” he adds.
That ocean of free car-parking space is presenting further opportunities for retailers. When out-of-town stores were built, the 500-plus attached car-parking spaces were a necessary evil, but with footfall down, few are ever full (except during peak periods such as Christmas).
According to industry sources, Sainsbury’s has reviewed its car parks, looking at which are too big and what it could potentially do with them - it even trialled a pop-up barber’s shop recently in a car park at its store in Canley, Coventry.
Asda has gone through a similar process, and is now releasing chunks of development land, says Alex Munro, partner in the retail development team at Knight Frank. “Asda is out in the market with half an acre here and two-thirds of an acre there, where it has surplus car parking on some stores,” he says.
The hope is that it will attract complementary non-competing users such as food and beverage operators. Other than tackling the surplus car-park issue, Asda has so far done very few shop-within-shop deals with other retailers despite having many hypermarket-sized stores in its estate.
As for Morrisons, it faces less of a problem because it did not go down the hypermarket route in the first place, although it has trialled Peacock concessions in some stores. Sources say its main focus will be to work through the closures programme. Then, maybe later this year, it will start to look at excess space in underperforming stores.
When it does eventually tackle the space problem, it is probable that like the rest of the big four, it will go down the concessions route rather than attempt to sublet space. “Concessions are easier to deal with because you just give retailers an area of space that doesn’t create leases and sometimes it’s turnover related,” says Munro.
Sublets potentially carry a heavier cost burden, adds Witherell. “The dilemma with sublets is, in theory, you might have a store that’s 10,000 sq ft too big,” he explains. “So we will go to the supermarkets and say: ‘Here’s a list of retailers that want to take that space at £15/sq ft, which would give you an extra £150,000 a year.’
“But then you have the knock-on effect of refitting that store. It’s not just a case of building three walls and fitting a new shop front. The cost often runs into millions because you have to relocate your refrigeration and freezer kit. So the income stream doesn’t offset the capital requirements.”
I would be amazed if Asda, Morrisons and Tesco are not looking at strategic buys for a more rounded offer - John Witherell
Although most agree concessions are the way forward for the supermarket groups, there is less consensus over which brand tie-ups and formats work most effectively. Gyms appear to get the nod from most retail experts.
“This seems to be the lowest-hanging fruit for them at the moment in terms of what will drive their own sales and the ease of subletting,” says Keen. “In the larger stores, a lot of the excess space is on the mezzanine floor.
They don’t need it after they’ve cut down on the bulky, non-food stuff, so they’re clearing the mezzanine and putting the stuff downstairs that they want to keep and then subletting the entirety of the mezzanine to a gym. Not only do they get rent, they are driving footfall to the store and people are coming out of the gym hungry, so it can be quite healthy for business.”
There’s currently also an untapped opportunity for the grocers to partner with pure-play online operators, believes Harper Dennis Hobbs director - head of retail consultancy Jonathan De Mello: “People are visiting hypermarkets for grocery shopping but a lot of that space could be used for click & collect hubs for some of the pure-play online brands such as Amazon, Net-a-Porter and Missguided,” he says. “That is something they could be doing more of.”
Witherell doesn’t rule out the possibility of more strategic acquisitions over the coming months in the wake of Tesco’s purchase of Harris + Hoole and Giraffe and Sainsbury’s bid for Argos. “If you’re running a grocery business, the changes we’ve seen over the past three years are not a blip - they are here to stay,” he says.
“So you’ve got to say to yourself: ‘Do I carry on making very small margins or do I shift my offer and say I’m not just a grocer; I’m more of a general retailer and I’m not just reliant on the very small margins that are available on food?’ I would be amazed if Asda, Morrisons and Tesco are not looking at strategic buys that might be available just to give them a more rounded offer.”
Whatever approach the grocers ultimately take, it is vitally important that they get the balance right, says Munro. “They are primarily food retailers and the food retail experience of customers has to be great so they’re only going to do the sort of concessions and subdivisions where it doesn’t significantly affect their trade because the core business of the big four is large supermarkets. That’s where they make their profit.”
So how long will it be before the grocers embark on major rollouts of new store-within-store concepts across their hypermarket estates?
“I think we’ve got another year of trials,” says Witherell. “They’ll all be watching footfall numbers and sales takings and the retailers will want to measure that for a reasonable time before you see them committing to a wider rollout.”
Make no mistake, though. In the intensifying battle to regain market share, it is very much a matter of when rather than if the big four make those concessions.
Drawing on its demographic data, location experts CACI present a snap-shot of non-grocery retailers that would provide a good fit with three of the ‘big four’ supermarket chains:
“Asda’s shopper profile is skewed towards the lower affluence groups with greater proportions of ‘financially stretched’ and ‘urban adversity’ groups. In terms of retailer choice, these customers have strong overlap with brands such as Foot Locker, JD Sports, Shoe Zone and Sainsbury’s recent target, Argos. From a leisure and catering point of view, Greggs, KFC, Harvester, McDonald’s and Burger King are well suited to its customer base.”
“Tesco’s profile is undoubtedly the flattest of them all, meaning that in practice the right retailer match will be very dependent upon the store catchment. That said, based on pure demographics the best matches are Schuh, The Fragrance Shop, Mountain Warehouse and Clas Ohlson. From a catering point of view, Tesco-owned Giraffe, Frankie and Benny’s and Gourmet Burger Kitchen are among the best matches.”
“Sainsbury’s, with its South East and London-centric store network, has a more affluent and more urban profile. This means its natural overlap is with brands like Paperchase, fashion retailers such as Zara, Mango and French Connection along with Mamas & Papas and the Apple store. From a catering point of view, it is well matched with coffee shops such as Starbucks, Caffè Nero and Pret a Manger, and restaurant chains such as Jamie’s Italian, Yo! Sushi and Pizza Express.