Travel a few miles in any direction and the chances are you'll come across a food store. In fact, let's face it, walk round the corner and you'll probably find a shop selling food. So have we now reached a point where we have too many stores? The answer is far from straightforward as PricewaterhouseCoopers' Kim Green points out: "Over the last 20 years, UK retail space has grown by something like 35%. If you then strip out inflation, sales density should have plummeted, but the truth is, it hasn't. Because per capita income and disposable income have increased, retailers have enjoyed increases in retail sales density." So although retailers have expanded, sales have expanded with them. But does that mean we haven't reached saturation yet? After all, Green points out these figures could soon be reversed by changing shopping habits; with home shopping increasing, the big superstores could find themselves with a lack of customers. It's not a simple issue. In pure numbers we've seen a reduction from about 146,000 stores in 1961 to 34,000 in 2000. Yet during that time we've seen a variety of different store formats being built, particularly superstores. But now we're starting to see a return to small, convenience formats. Is this being driven by customer demand or are harsh planning regulations forcing the big operators to abandon their plans for large superstores? "We've certainly reached saturation when it comes to the big stores, according to planning authorities," says Healey and Baker's property consultant John Strachan. This is something that Tesco certainly acknowledges, as corporate affairs manager Richard Anderson says: "The days of the large out-of-town superstore are virtually over. We understand the reasons why planners are directing us towards the town centre, even if we don't agree with all their points." Planning Policy Guidance Note Six (PPG6) advises planning officers to pursue the government line of sustaining and enhancing existing centres', which means greenfield out-of-town sites are no longer on the agenda, while town centre or edge-of-town centre developments are given preference, and this limits the potential size of store. Despite the planners' zeal in limiting, if not stopping, the growth of large stores, have we reached a maturity in that area? Not according to Strachan, who says the multiples would be keen to continue their superstore and hypermarket expansions: "There would be considerably more out-of- town stores if there were no planning restrictions." But perhaps that's looking at the issue too simply, as a saturated market could well be the driving factor behind the big grocers' need for larger stores, as Accenture's Oliver Benzecry explains: "In terms of pure grocery we've been at saturation for quite a while. But saturation doesn't matter ­ it's all in the eye of the beholder. If you can't get the returns on your space by being purely in grocery, then you wander off into other products and markets." He says we are starting to see the effects of saturation in the way in which the multiples are beginning to move into non food and varying their formats: "The supermarkets are talking about adding 6% space, year-on-year, yet they're still getting good returns. "How they are doing that is by adding value, for instance, once you would simply buy a lettuce, now you can buy a chopped lettuce. We are also seeing them expand into adjacent products like health and beauty, and of course non food, then you expand your share of the wallet with financial services and insurance." So retailers are moving into new areas, supplying different products away from the more traditional grocery offering. But for retailers to expand their offer, they require space, something that, with the planners breathing down their necks, is proving difficult to gain in the sizes they want. This leaves the grocers in a Catch-22 situation; to continue to grow they must expand their ranges and the simplest way to achieve that is to build bigger stores, forbidden by planning. So how are they overcoming this? Safeway's communications director Kevin Hawkins says: "Across the whole sector we're starting to see smarter use of retail space in response to growing demand." This means smaller format c-stores, and, rather than new-building big stores, the adaptation of existing stores. The small, high street c-store was something the multiples had previously shied away from, opting for the big out-of-town superstores. But that left a hole in the market, and with a shift in shopping habits leaving consumers eager for fresh convenient offerings, the multiples are now beginning to push back into that area. However James Loman of the Association of Convenience Stores is not worried about saturation in the sector: "Convenience is all about grasping local opportunities and there are still plenty of opportunities out there." He highlights the food deserts ­ poverty stricken sectors of the UK which are not served by a local, easily accessible food store, as areas of opportunity. But even with smarter use of space, Cap Gemini Ernst and Young's head of retail Mark Dorgan says the big operators have the advantage when it comes to growing their business. "Superstores allow more efficiency when it comes to floor space. Those with the bigger floor space are growing, while other companies like Somerfield are not and have a lower return per square foot." So the more space you have, the easier it is to diversify and boost returns. After all, non food has much higher margins than grocery and, as Dorgan says: "The spend per person on non food is double what it is on food. Tesco could probably double returns per square foot per person if they could increase non food deeply enough." So there are real growth opportunities in non food. But it doesn't have to be all about non food. Among the larger multiples, Safeway is is adapting to market demands to try and grow its business, varying its formats and developing instore catering and convenience ideas. However, Hawkins disputes the notion the grocery market is saturated. "Traditional grocery is mature when you talk purely in terms of tins and dried, ambient stuff. But I wouldn't subscribe to the idea grocery is saturated. You'd have to describe it in very narrow terms to have that view. You could make the same observation about other sectors in that case ­ some household products are hardly big growth areas." He says Safeway views fresh as the way forward: "There's only one way of selling baked beans, but fresh has a great deal more scope. We're finding big new fresh-to-go areas with big seating sections are acting as a destination point for our new store in Plymstock. Some people are coming in to try the food, and then do some shopping on the side." So with Tesco and Asda both pursuing a non food route and Safeway exploring the fresh and catering angle, we're starting to see a lot of innovation among the bigger retailers. But the move into non food and health and beauty inevitably means, with planning restrictions limiting new builds, that less space is available for food. This could have a knock-on effect, as Accenture's Benzecry points out: "As people move space away for non food, the grocery market becomes less saturated." Which is good news for smaller food retailers who may lack the scope or ability to branch out into other, less mature markets. And it's certainly far from completely bleak for the smaller, pure grocery retailers. Benzecry says: "There's definitely still room to grow your business, but that growth is at the expense of a competitor. Someone will have to suffer." Basically, the more innovative and clever retailers will continue to grow by simply being better than their competitors or offering something unique. Booths is one food retailer which subscribes to that belief. Marketing manager Michael Lough says: "We concentrate on what we're good at, and our customers come to us for those reasons ­ our regionality offering, our quality foods and excellent service. We have a much more personalised store atmosphere, we're not daunting for our customers." The small independently owned chain has 26 stores around the north and north West, but it too struggles with the planning laws when it comes to expanding,. However Lough says it works hard with planners to meet their demands, and this manifests itself in a brand new store in Settle, another being built in Kendal and applications under way for stores in Lytham and Anstell. "There is still scope for new stores, but in terms of saturation, it's getting there. You only have to look at the activities of the big boys to see they are looking at other avenues. We are having to grow our share by taking it from our competitors. Our solution to the problem is simply to be the best at what we do." It's certainly true that there are very few virgin territories left in the UK. Wherever you go, you are likely to be entering into competition with an existing operator of some form or other, but have we reached a point where the big operators are as likely to take trade off themselves as they are their competitors? Tesco's Richard Anderson says it can happen, but it's not necessarily a problem: "There are instances where we've opened a store and it's hit sales at another store. But in that case the existing store was more than likely overtrading anyway, and more people were shopping there than it was designed for. We may take trade away from one store, but only where that loss can be weathered." But for the less widespread multiples, there are still plenty of areas left to conquer. Asda's head of strategic development Denis Mallas says he doesn't think growth prospects are slowing for it: "The Competition Commission touched on the lack of choice in some areas. It talked about towns with just one choice for customers and no low price options. We still think there's plenty of scope for new developments." Morrisons is another retailer for whom saturation holds no fears, for the moment: "Saturation and the issues surrounding it, is not a new debate. It's been raging for the last 10 years, except we all keep expanding," says property director Roger Owen. "We view saturation in its purest form as a company phenonema, not an industry phenonema. If you open a new store and it takes trade away from another, then that means your company has reached saturation. If we open a store in Bristol we're not going to take trade off any of our existing stores. So therefore, until our Penzance store is taking trade from our St Ives store we will not be saturated." Owen thinks some of the more nationally represented multiples may be feeling the effects of saturation more acutely. Despite the idea that saturation is a company issue, there are still industry wide ramifications. For instance if every grocer was simply opening identical food stores then saturation would be reached quite quickly as Accenture's Benzecry says: "Putting it very simply, if they were all just selling baked beans, there's only so many baked beans stores the UK can take before they begin diluting their own sales." So Morrisons, despite expanding into new territory, will still need to take market share off its competitors, by varying its offer ­ or find itself facing the effects of a saturated market. So the question still remains. Have we reached saturation point? The fact that the larger multiples are expanding at consistent rates of between 10 and 20 stores a year would suggest perhaps not, but if we take a closer look at their activities we can see that maybe saturation is a driving factor behind that expansion after all. The retailers will talk about their moves into new areas as meeting customer demand, but at the end of the day, does their diversification simply boil down to a need to continue growing their business in the face of increasing saturation? Perhaps saturation is a myth ­ something that will never be reached. Or perhaps retailing is such a dynamic industry that it will never stand still long enough to allow saturation to catch it up, as Accenture's Benzecry says: "Saturation has been with us for a long time, and the best retailers simply manage their way out of it." n {{COVER FEATURE }}