Merge or be bought – the future of the symbol market?

The tectonic plates of retail are shifting underfoot as the market undergoes record-breaking mergers and consolidation. Why is this happening, and will convenience survive?

John Ibboston

“It is a very crowded market place – there is going to be a real shakeout in terms of the players”, Nisa boss Nick Read told The Telegraph earlier this year.

According to the former Tesco and Aldi executive, the grocery retail market is “crowded” and a major process of consolidation is inevitable.

A few months on from his comments and the successful symbol is reportedly in the midst of a possible sale, with speculation in the national press it could “demutualise” its member-owned model.

The reports are all the more surprising as the retailer is on track to grow sales to £2 billion by 2019, from £1.3 billion last year.

Merger and consolidation news has been a regular occurrence in the retailing headlines recently. In the past year, Sainsbury’s has takeover of Argos, and Tesco is in the process of acquiring Booker not long after the latter bought Musgrave’s UK presence.

In June, acquisitions switched up a gear with Amazon’s shock $13.7 billion (£10.7 billion) purchase of Wholefoods, while it emerged Sainsbury’s could be the customer behind the purchase rumours for Nisa.

Nick Read

So what is happening to the market and why?

John Ibbotson, consulting partner at leading UK retail management consultancy, Retail Vision, believes UK retail is headed in a deadly direction for small independent retailers and symbols groups in their current format.

To survive, John told Neighbourhood Retailer, independents and symbols will either have to merge or die.

“Over the past 20 years, the convenience sector has contracted,” John said. “In the last 10 years it has bounced back, due to the changes in shopping habits, but that hasn’t lasted.”

His analysis is reflected in figures from Local Data Company Ltd (LDC), which published its influential Retail and Leisure Report in March showing a trend of contraction in the number of convenience stores.

The LCD report shows convenience store numbers hit a ten year high in 2013 with a net 1389 openings that year. Since then, the pattern has been all downhill, with a net 409 closures of convenience stores in 2016.

“Tesco have over 1,000 convenience stores,” John said. “They, and the other multiples that have entered the convenience market have forced it to change.”

The market is rebalancing, with the “crowded” marketplace – as Nick Read put it – now being forced to recalibrate.

 

Net Convenience Openings & Closures in UK market 2012-2016

2012       202

2013       1389

2014       504

2015       428

2016       -409

*LCD’s Retail and Leisure Report, March 2017

 

But as the market resets, independent and symbol convenience is finding itself between a rock and a hard place. On one side are the multiples and their supermarket and convenience formats; on the other is the jaw-dropping growth of internet shopping which is quickly purging non-food from the high street.

Internet shopping as a platform, by the way, is an irrelevance for convenience, according to the Retail Vision chief, as the local neighbourhood store’s lifeblood is its proximity to customers and its physical appeal.

However, there may be a sliver of light between the two aforementioned impermeable surfaces.

“The convenience store is in a place between the weekly supermarket shop and internet shopping,” John said. “It’s not worth your while shopping online if you’re spending less than £50 because of delivery costs, and that’s where convenience fits in.”

According to John, this gap for convenience has got wider due to the shopping habits of an increasingly important customer profile – the millennial.

“Millennials are in a tough situation – they can’t get good jobs, they can’t afford a house, or savings, and are up to their eyes in debt because they have to pay for their education.

“A lot of them go to convenience stores for each meal and many live off prepared meal solutions.”

The growth of this shopper – and those working long hours with little time to cook – is feeding into the demand for prepared meals and the food-for-now and food-for-tonight missions where convenience has excelled.

Millennials are also one of the first generations to see a shrinking level of car ownership, ruling out the big box, weekly shop for many.

So where is this all taking us – where will convenience be in ten years’ time?

“Symbol groups, in the end, will have to merge or be bought up,” John said. “There’s simply too many of them. For the big supermarkets, their period of big growth is gone, which is why they are buying up other operations and consolidating.

“The Big Four will not open many more stores. Those operating in convenience may open a few more small-format outlets, but it will happen much less.”

For John, the disruption of the discounters has played a major role in thinning out the margins that had once provided the opportunity for growth, and their influence will be lasting.

“The discounters will continue to grow, but that will end when they run out of places to open, and the Big Four will be forced to compete with them directly.

“We’re headed for a mature market where, really, nobody will be able to make any money. Grocery retail once survived on margins of 6%, but that will fall to 3% or maybe lower.”

It’s a scorched earth scenario from John but, by uniting, he believes the independents and symbols can form a phalanx to hold onto their position even as margins shrink.

“Convenience stores will still be around,” he said. “But they will have to work harder and smarter to remain relevant.”

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