The UK’s listed supermarket giants are “totally addicted to space” and must slash their overall store space by about a fifth, Goldman Sachs has warned.
Goldman analyst Rob Joyce and his team, in their latest analysis of the sector, said that overcapacity in UK grocery still needs to be addressed as “the only viable solution for a return to profitable growth”.
Tesco is the most likely to be the drive of industry space reduction, they added.
The analysts said that UK grocers have been “excellent retailers” but too much focus on profitability has allowed discounters to get too strong.
“We think overconfidence in the market structure and their own retail models has caused them to increase prices and overspend on store assets.
“This in turn catalysed and compounded the structural shifts towards cheaper discounters, as well as more accessible online and convenience channels,” said Joyce.
“Basically, too much supermarket floor space was added, prices were increased and services cut to support profit margins as sales densities fell.
“Alongside behavioural shifts to convenience and online channels, this also widened the value gap versus Aldi and Lidl, which had been improving their own ranges and offer, catalysing customer shifts to the discount channel.”
Joyce said the discounters’ returns are now too high for Tesco, Sainsbury’s and Morrisons to beat them on price.
They say Aldi would have been much easier to stop three years ago when the major players earned returns twice that of the German discounter.