The battle for convenience shoppers is only just beginning and the multiples have much to learn, according to Siân Harrington

Two years of intense activity in the convenience sector have left independents reeling. The multiples and co-ops have bought more than 2,000 c-stores. Since March this year alone nine members of The Grocer Top 50 independent chains have been acquired. As Andy Thornton, managing director of convenience specialist Srcg says, if you add Londis to the list “the level of activity puts the comings and goings at Chelsea Football Club in the shade”.

But while the battle for sites may be slowing finally thanks to the dearth of acquisition opportunities, the battle for share of wallet is just beginning. And the supermarkets new to the fray face as many challenges - many of them identical - as the traditional players.

The first is to adapt their offer to changing consumer expectations. As the focus of consolidation shifts to acquisition of smaller chains, so the focus in convenience will need to shift to a greater understanding of what the shopper wants.

In short, big box supermarket operators will have to turn their attention to moving beyond a small version of their mainstream offer and towards a locally orientated convenience offer if they are to get real payback from their investments.

That is not to say they aren’t making progress. This week Srcg published its third annual report into the market - The Shape of Convenience 2005. On the strength of interviews with more than 70 senior industry executives from across the world, Srcg predicts there will be 3,000 to 5,000 supermarket c-stores on the high street in five years’ time. Tesco will reach its target 1,000 Express stores and may even make 2,000. Sainsbury could achieve 500.

Some of these executives do not believe Tesco’s model is profitable.But Thornton says: “The Express model has been operating for a decade and Tesco has spent a lot of that time perfecting the supply chain and developing the systems that meet the needs of a smaller store. In addition, as it follows its aggressive conversion campaign, Tesco has the opportunity to reach the end of this year in possession of a full-scale convenience operation.”

Mark McCullough, retail analyst at Goldman Sachs, adds: “Tesco Express is making money. Indeed, the potential to do more than 6% EBIT margin is there; you can tell just by how aggressively it is pushing it.”

But there are several elements of the convenience equation that it and the other traditional big box players have yet to get right - not least how to win over new customers as underlying resentment of what Srcg calls the “Tescoisation of the high street” grows.

Despite assurances from chief executive Colin Holmes that the model is profitable, there is much debate as to whether big box retailers are truly making money out of convenience. “Certain attributable costs may be moved around the balance sheets to dress the picture up,” claims Thornton.

In the medium term Tesco needs to show it can deliver acceptable like-for-like growth. In the long term it will need to demonstrate the value its convenience format is adding to the bottom line. Doubling sales in a converted store sounds impressive, but just putting above the door the Tesco name, with its reputation for fresh and chilled, almost does the job on its own. The key now is to develop the offer to meet customer needs in differing locations.

Another challenge is to move away from a slimmed-down version of a supermarket.

“Tesco has put quality back on the high street and can get away with its shortcomings for now,” says Thornton. “However, as standards generally improve across convenience, shoppers will become ever more demanding of Tesco. Issues such as availability are all the more pressing in convenience operations.”

One area in which all the big box retailers disappoint is food for now/food for later (see box). This is perhaps the biggest opportunity for traditional convenience retailers. However, developing a fresh food for now offer is a challenge, while a food for later solution is one that has so far eluded most global convenience-retailers, concedes Srcg. “This will be a hard nut to crack, but whoever does stands to win a huge prize,” says Thornton.

Whatever its challenges, Tesco is still way ahead of its multiple competitors in the field, mainly due its ability to convert large chunks of its acquisitions in a short time thanks to a standard box offer.

By its own admission it is still at the adolescent stage of development. As it rolls out its Express format at the rate of one every working day next year, it will continue to build capability and refine its model. “What we see today will not be what we see tomorrow. Tesco learns very, very quickly,” says Thornton.

In contrast, Sainsbury appears to be floundering. It has been playing catch-up since Tesco bought T& S in 2002 and is much slower at converting stores. Its strategy confuses shoppers and, say analysts, suggests it does not believe in its brand.

“Sainsbury’s at Jacksons and Sainsbury’s at Bells are a dilution at best and a muddle at worst,” says Thornton. “Add to this Local, Central and Local at Shell and it is confusing for the shopper.”

One of Sainsbury’s biggest strengths is its tie-up with Shell, which offers the promise of national scale. But roll-out is painfully slow.

The question is whether Jim McCarthy, former chief executive of T& S and now Sainsbury’s head of convenience, can give Holborn the kick it requires.

In Srcg’s interviews with non-UK convenience operators, one name frequently topped the list - Marks and Spencer’s Simply Food. Thornton believes Simply Food has been a scapegoat for deeper problems within the main chain and that only six sites fail to meet the acceptance criteria set by chief executive Stuart Rose of more than £3m sales a year and not being within a defined catchment area of an existing store.

“If Simply Food is the icon brand of UK convenience and everyone else is paying vast sums to be in the game, why is M&S the only retailer to exhibit a cooling of its interest?” asks Thornton. “The cannibalisation argument appears to have been exaggerated and used as an excuse for some poor performances in the main chain.”

Simply Food is in a state of flux and may exit altogether. This would be disappointing and Srcg believes a tie-up with an oil company or expansion with capital from Compass would be a better way forward.

“Simply Food will not become a traditional neighbourhood c-store. It will become a unique ‘on the go’ transient hub, which will be hard to match,” says Thornton. “Simply Food is a superior offer; it is just not getting the message across to shoppers.”

Of course one retailer’s challenge is another’s opportunity. While Tesco, Sainsbury and M&S get to grips with convenience, the independents should use the time to focus on areas of differentiation, such as food to go and health.

If they continue instead to dwell on unfair buying terms and the Competition Commission’s approach, they’ll be letting a valuable opportunity slip through their fingers, warns Thornton. “The blame for the feeding frenzy is laid by many traditional players at the door of the Competition Commission.

“They have chosen to ignore the trends towards a more convenience lifestyle and its immediate impact on shopping behaviour.”

Multiple or independent, no one should ignore the wider market. With Srcg tipping Boots, Starbucks, Benjy’s, Thresher and Subway as the ones to watch, competition on the high street will only get tougher.

Where the multiples must act
>>SRCG spells out what must be done to win over new customers to convenience formats

Meet local needs: convenience formats created by the big supermarkets do not cater for local customer requirements, which can vary widely

Get rid of the mini-supermarket feel: this is compounded by high shelves, too much grocery and a cluttered layout

Rethink store layout: lead with a more convenience-focused mission such as food for now rather than produce which is typical of a multiple

Rethink space allocation: dry grocery is vastly over-spaced at the expense of impulse snacking items, food for now and food for later

Improve food for now offer: compared with Prêt à Manger, Marks & Spencer and Benjy’s the offer is weak and largely dependent on the traditional prepacked wedge sandwich. In many stores you cannot buy a full lunchtime offer in one place. Breakfast is not widely catered for and few sites sell hot drinks

The food for later offers could be more imaginative: they’re dominated by ready meals

Cut queues at peak times: Shoppers will accept a 5min queue on a one-hour full shop, but not at a convenience store when the average shop lasts only 8mins