Tesco's aim to convert half the One Stop/Day & Nite estate to the Express format in four years looks overly ambitious, according to a new IGD report.
In Convenience Retailing: Implications of Market Consolidation, IGD claims four years is "somewhat optimistic," and suggests six years is a more realistic timescale for 450 conversions, with the bulk towards the end of the period.
Unlike forecourt sites, where buildings may be quickly demolished and rebuilt, many One Stop stores form part of a larger building or parade of shops and rapid conversion may not be possible, claims IGD.
Moreover, One Stop sites are not purpose-built c-stores, and Tesco will have to work within the constraints of existing buildings, making it harder to "drop in" a standardised store solution.
As stores are converted to Express, and brought into Tesco's own distribution, the volume going through T&S distribution will decline, making it less efficient, adds the report. "Vehicles serving One Stop will be forced to travel further between deliveries, undermining logistical efficiency."
The decision to retain T&S fascias, adds the report, "appears quite difficult to justify in financial terms since it will tend to reduce efficiency rather than enhance it." Longer term, this leaves Tesco with the option of developing a new format for the remainder of the T&S estate, transferring all functions to Tesco head office, or even selling stores off. Nevertheless, the newly strengthened Express, which IGD predicts could generate sales in excess of £1.3bn by 2008/9, will prove very profitable for Tesco, claims the report. Operating margins at Express are estimated to be around 8%, compared to 6% for the whole of Tesco. This would equate to operating profit in excess of £100m by 2008/9, predicts IGD.
Furthermore, IGD claims any impact on supplier margins from the T&S deal will be offset by increased volumes and opportunities for "better execution of activities".
Separately, it predicts the Co-operative Group's convenience fascias (Welcome and Alldays) will grow from their current £1.2bn in sales to £1.8bn by 2006, a 48% increase. The deal should also increase the buying power of CRTG by 10%.