Houston calling’… ‘This is the end of the space race’. And so Tesco chief executive Philip Clarke announced that supermarket development in these isles had reached a fundamental new threshold. After decades of sustained expansion, Britain’s supermarket groups are now taking their foot off the new store development accelerator. Why and what does this mean?
The why reflects an amalgam of processes, but most importantly the fundamental change in the prospects for the British consumer. With indebtedness, less access to credit, rising unemployment, low wage growth and prices rising ahead of incomes, there has been a structural change in demand. And so the business plans supermarkets worked on five years ago are redundant.
Technology has also contributed to the change in supermarket strategy. The internet is adjusting the way goods are bought and so the hypermarket is being redefined, although we do not yet foresee its extinction.
“The business plans worked on five years ago are redundant”
Additionally, the growing capability of retailers in the convenience channel in particular is reducing the need for additional superstore space and there may be evidence of a consumer reaction to corporatism.
The upshot is that supermarkets will open fewer large stores. So, landowners hoping for food retailers’ cheques may need to think again. Planners will have less work to do. Builders will have lower order books but shop re-fitters will be more active as existing superstores and hypermarkets are modernised and downsized, with more space given to food in many cases, as non-food continues to migrate online.
For investors in supermarkets, there is the prospect that businesses that are cash-generative at an operating level may become so at what we call a free cashflow level. So, with less expenditure on expensive land and buildings, supermarkets may start to generate rising cashflows, which in time should support retained profitability and so dividend flows.
I underscore the word ‘may’ because rockets are not easy to bring down and so it is likely to be years before these dynamics fully work through - but the first steps have been taken.
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