Asda has proclaimed no halt to expansion, but Tesco’s rivals are already placing more emphasis on refurbs instead of newbuild

A week or so after Tesco announced its retreat from the space race, Asda’s headline-grabbing £500m expansion programme must have hurt.

But beyond the PM’s photocall at Asda HQ, and the media frenzy over Tesco’s retreat, what does the future hold for the supermarket space race?

Since 2007, CBRE estimates 15.6 million sq ft of supermarket space has been built - equivalent to an estate the size of Asda at the time - with Tesco leading the way, boosting sq footage by 2.8 million sq ft in 2010/11 alone, and pledging a further 2.7 million sq ft in 2011/12.

However, its decision to rein back investment in newbuild and focus on refurbs and extensions continues a trend that was already emerging in 2011, figures from analysts Glenigan reveal, when newbuild dropped to £664m while spending on refurbishment almost doubled to £461m (see table).

Asda claims it has no plans to slow down its expansion, however. Having converted 147 Nettos in 2011, “there is no lack of ambition and no lack of support from Walmart,” it told The Grocer this week. “We have money to invest and have identified plenty of locations in, or on the edge of, town centres that we think would support new stores. There are hundreds of locations we can open in.”

But beyond the hyperbole, Asda’s 2012 plans fall well short of its 2011 programme. Asda added 10% to its estate in 2011 through newbuilds, extensions and the Netto stores, taking it from 17.6 million sq ft to 19.3 million. Adding the 600,000 sq ft it announced this week - also planned for in or on the edge-of-town centres - will only swell sales space by 1.5%, a figure described by Clive Black at Shore Capital as “not particularly onerous” for rivals, adding that cannibalistic concerns about “space to market dis-equilibrium are overdone”.

An Asda spokesman also emphasised this week’s announcement wasn’t necessarily the sum total of its ambitions for 2012. More stores will be built if the right locations are available at the right price.

Sainsbury’s is even more bullish. Its ongoing plans for 2011/12 will see it complete 1.4 million sq ft, with a further 1.2 million in 2013. The spokesman adds it will focus on “areas in which we are under-represented, such as the north, Scotland and Wales,” says a spokesman. However, he adds that Sainsbury’s will issue an update on its plans at its preliminary results in May.

Meanwhile, Morrisons grabbed some headlines of its own this week after snapping up 10 former Best Buy stores, which will add 400,000 sq ft to its estate - although the stores will be 100% devoted to Kiddicare. That is on top of the 2.5 million sq ft floorspace it already plans to add over the next three years, which will include expanding numbers of its M Local stores. Morrisons also remains, however tenuously, in the race for Iceland. If it picks up those 778 stores its current plans would get another boost.

An overarching snapshot of the industry pipeline taken in December by property analysts CBRE also looks healthy.

Currently, total ‘food’ planning applications stand at over 44 million sq ft. Space that has consent or is under construction is at 25 milllion sq ft.

It all adds up to a lot of activity by the supermarkets and a healthy looking pipeline. None of which, on the surface, suggests the space race is over, or in danger of a dramatic slowdown.

But Black suggests that healthy pipeline plans are no substitute for pouring cement into the ground. And Pam Jones, head of retail at property law firm Hill Dickinson, detects a subtle space race slowdown is already taking place as land purchases become less scattergun.

“We are still seeing instructions on newbuilds, but speculative land purchases are starting to evaporate. Previously clients may have rushed in to purchase land and maybe do something with it in the future. But now we are seeing a far more cautious approach. Purchasers are paying far more attention to how locations fit into gaps and how they will work with existing logistics.”

Jones also highlights the same trend as Glenigan for refurbs and extensions instead of newbuilds. Taking over existing portfolios, as Asda did with the Netto stores, offers retailers a ready-made, out-of-the-box solution that they can “refurbish, rebrand and reconfigure, rather than going down the more complex and lengthier newbuild route”.

Glenigan predicts that in 2012, extensions and refurbs will constitute the next stage in the supermarkets’ battle for supremacy.

But what of Tesco’s plans? It may intend to cut out expansion, but how easily can it slam on the brakes?

It can’t, says Evolution analyst Dave McCarthy. Not for a couple of years at least.

“This level of capital spend is not a tap you can just turn on and off,” he says. “There is a two-year lead time on it. If Tesco doesn’t open the stores it has permission for it will be sitting on an awful lot of expensive property. Then complaints will flood into the competition commission saying Tesco only bought the land to prevent its rivals building on it.”

And the last thing Tesco needs right now is any more bad publicity.