THE PHENOMENOM OF OUT OF TOWN RETAILING IN THE UK 
By Mike Watkins, Manager of Retailer Services, ACNielsen

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Hypermarkets in the UK have hit the ground running.  Already Tesco and Asda dominate the trend of out of town destination shopping, attracting consumers who wish to buy non-food goods alongside their groceries, but as store sites reach a premium, how will hypermarkets affect the fortunes and strategies of other retailers?

The story so far

As retailing history goes, the advent of out of town retailing is a relatively new trend.  In the 1970s, French brand Carrefour was the first to make a brief foray into the UK, but it wasn’t until the 1980s, when planning restrictions were relaxed, that big out of town supermarkets really started to make their mark. 

In the mid to late 1990s, hypermarkets were beginning to spring up - lead by Sainsbury, Tesco and Asda, but when US-based hypermarket specialist Walmart purchased Asda in 1999, bringing an even wider choice to the UK market with their new super-centre format, the pace picked up considerably.  And these retailers haven’t looked back.

Indeed, research conducted in May 2003 (Scantrack Total Business Read - All Food and Non Food) found that 48 per cent of everything we buy in UK food stores is bought in out of town stores – premises that are more than 25,000 square feet in size.  But breaking that figure down even further, we find that 24% of this 48% is purchased in hypermarkets sized more than 40,000 square feet in size, and this sector remains the fastest growing sector of all retailing formats.   

According to further ACNielsen research, Tesco, (23%) Asda (14%) and Morrison's (5%) are the only three major retailers that showed a growing percentage share of the retail market place (Source: Homescan Food and Drink, March 2003 compared with March 2002) and it so happens that it is these three retailers that have aggressively pursued the out of town option as part of their retail strategies.   And if we include all the “new“ Non Foods now sold by these grocers, Tesco now has 28%, Sainsbury 19% and Asda 18% of all sales.  The evidence speaks for itself.

Modern out of town stores sell a cross-section of groceries, fresh food produce and non-food merchandise ranging from health and personal care products, clothing and footwear, and home and leisure goods.   In a market place worth £66 billion, groceries make up £38 billion; fresh produce makes up £21 billion and non-food products amount to £7 billion.  However, the key is to look at percentage growth…according to ACNielsen’s Scantrack in May 2003, in the previous 12 months, non-food products sold in our retailer superstores rose by 12%, whereas groceries and fresh produce rose by 4% and 5% respectively.   And of the non-food products, home and leisure product sales grew by a staggering 20%, and clothing and footwear by 19%.

Putting this into context, we are witnessing a rising trend in the  UK of consumers shopping at hypermarkets on average once or twice a month for a broader shopping experience.  Out of town   really has become a destination and one-stop shop. They go with the intent to buy food, but are happy to browse the non-food sections and, increasingly, consumers are becoming more confident at buying clothes at hypermarkets, just as consumers are when visiting hypermarkets in France where clothing, for example, now accounts for up to 10% of store sales.  Of course, the quality of the food products remains the primary reason for consumers to go to retailers, but they also know that they can now purchase a range of non-food items as well.

Why food retailers move into non-food goods

The key factors for  UK food retailers to expand into non-food markets are many.  First, the grocery market is already mature with little volume growth anticipated for the future and consumer price deflation in many core grocery categories.  With higher disposable incomes, consumers are spending more on leisure goods while the amount they spend on their weekly or monthly grocery shop remains virtually static.   There is also greater opportunity for higher profit margins in the non-food sector and this, linked with the value proposition of non-food items as well as global influences, means that food retailers can use their buying power to leverage cheaper purchase prices.   Wal Mart, for example, now sells its George clothing lines in the  US  stores as well as in the UK through Asda…its global buying power has allowed them to purchase raw materials at cheaper prices.  Lastly, trade channels are becoming increasingly blurred…again, consumers no longer perceive the Asda and Tesco brands purely as food retailers; they know that they can also shop at their stores for clothes, CDs, mobile phones and home products too.

Since multiple grocers have already successfully captured the mindset of consumers when it comes to buying personal care, clothes and music or videos, the likelihood is that they will continue to achieve similar market penetration and foot fall, once they start expanding their non-food stock, such as electrical equipment, household and kitchen goods and other leisure goods.  Already we can see that some retail megastores are challenging department stores such as Debenhams and Marks & Spencer – as we see such quality items as cotton towels and fashions, for example, being sold at lower prices. And up to 20% of shoppers will now buy these categories as part of their out of town food shop.  

The squeeze for grocery space

But what does all this mean for groceries and fresh foods?   As the larger out of town stores plan to stock more and more non-food items, groceries are being squeezed off the shelves.  In the 1990s we saw in the region of 80% of supermarket and hypermarket shelves stocked with groceries and only 20% stocked with non-food items – the theme then being that non-food items were limited and featured purely for consumers’ convenience.   Just a few years later and evidence suggests that the percentage of food and non-food items in hypermarkets is much more evenly spread.   If the UK follows the French hypermarket trend, as it has done so thus far, then we are likely to see this movement plateau at about 60:40 food to non-food items in superstores within the next five to 10 years.  

Non-food items need more physical space than groceries but it is not necessarily the case that groceries are losing out. Grocery supply chains are extremely well organised and very efficient in terms of daily shelf replenishment; after all, the items are by definition FMCGs.   By utilising this replenishment system, more shelf space can be created for items such as clothing.   Another factor is consumers’ disposable income, leading to a greater tendency these days for people to buy less food and eat out more.  So one could argue that retailers don’t necessarily have to offer wide ranges of category items in all stores. 

Of course, that is not to say that ranges are not being cut as the number of category brands are rationalised in the hypermarkets. We mustn’t forget that such shoppers are there for the total shopping experience, not necessarily just for food, and additionally they are also likely to shop for food once or twice a week, in which case they may opt to shop at an alternative retailer for a deeper range of food products. 

Indeed, some food retailers such as Sainsbury count on it with a strategy to be the consumers’ first choice for food.  Although they stock a complementary non-food offer, it is as a convenience to their customers.  For example many of their stores have introduced concessions such as Adams for childrenswear.  Instead, they want to attract the consumer who is prepared to shop selectively for quality, non-food goods.

So what of the future?

There is no doubt that multiple food retailers are fundamentally changing the face of the  UK through the creation of out of town hypermarkets.  Non-food is a key opportunity for them to grow sales and profits both in the UK and abroad – Carrefour is testimony to that – and those UK-based retailers who are already subscribing to hypermarket strategies, particularly on a global scale have greater buying power, which often translates into lower prices for consumers in the UK.

Additionally, food retailers are already well versed in IT and logistics, and they will be able to put these skills to good effect for non-food items.  This will be essential since space for UK stores is at an all time premium – and it’s likely that extensions to existing stores will be vital to the development of non-food sales.   Where stores extensions are not feasible, we could see an alternative model emerge as food retailers choose to diversify by acquiring other retailers and buying into different trade channels or even opening stand alone Non Food stores .  Metro, the German retailer, advocates this philosophy and has already demonstrated success in crossing channels by owning department stores, cash and carry style outlets and hypermarkets. 

Whatever the strategy however, within the next five years, we are likely to see certain food retailers introduce more non-food product ranges, even dominate certain non-food categories and increasingly become destination stores of choice for clothes, “soft” household items, leisure products as well as groceries and fresh food items.

For further information, please contact:
Sue Kilner, ACNielsen, Tel. 01865 732324, Email: sue.kilner@acnielsen.co.uk
www.acnielsen.co.uk

Date article published: 27/06/2003