Supermarket sector shows strong fundamentals.
Nobody doubts that 2023 will be a challenging year for occupiers with rising costs and economic uncertainty. Yet for the supermarket sector there are still grounds for optimism.
Supermarkets reported strong results in the run up to Christmas when trading topped £12 billion. Asda, Sainsbury’s and Tesco all enjoyed growth of over 6%, whilst Aldi and Lidl saw sales rocket by more than 20% as they continue to increase their market share.
Despite ongoing investment in delivery platforms, supermarkets have not lost their appetite for strengthening their physical store portfolios. The likes of Tesco, Co-Op and Sainsbury’s have been particularly active in the convenience store market. Although the latter two have started to slow down their acquisition programmes in recent months, Tesco has accelerated its expansion. The retailer is on the look-out for new opportunities to open units of between 2,500 to 5,000 sq.ft. Preferred locations include new housing developments, neighbourhood centres, high streets, student residential areas or sites close to transport hubs.
Elsewhere, Asda finally followed suit and announced its intention to open 300 convenience stores. Given their takeover by the owner of Euro Garages, expect forecourts to play a key role in meeting that target. Amazon now has around 20 stores open and trading and although the pace of acquisition has slowed whilst it takes stock, the retailer is still keen to expand its UK portfolio. The likes of Costcutter and Spa also remain acquisitive, focusing mainly on localised parades and new housing developments.
The reduction in high street rents has fuelled the expansion of the convenience store market and opened up previously unaffordable locations. GCW for instance helped Tesco secure the former Bon Marche unit on Rye Lane in Peckham following a downward rental adjustment. Supermarkets are also keen to get into mixed use residential led schemes. Both Sainsbury’s and Amazon secured space at Aldgate development, Goodman’s Fields.
At the other end of the scale, there has been very little large scale supermarket development in recent months and time will tell whether the Asda takeover will really see them expand their store portfolio.
The middle ground is dominated by Aldi and Lidl who continue their search for c20,000 sq ft floorplates and car parking requirements of between 80-100 spaces. Both are having to deviate from this to continue finding sites in Greater London.
Aldi has so far proved more creative and flexible. Although it must impact on margins, Aldi has clearly decided that it is willing to compromise on its requirements to secure market share. Lidl is slowing down expansion as costs bite on its business model. The market will be watching closely to see if this is anything other than a short-term correction. Elsewhere, Morrisons has recently opened a number of its 15,000-20,000 sq ft Marketplace stores, although the takeover of McColl’s seems to be impacting on any further roll out.
Rentals for new convenience store locations are still holding firm and we expect to see a continuation of smaller format expansion. The question is whether there will be a resurgence in demand for larger formats, especially where supermarkets look to bring new brands in to drive footfall.