The New Norm or Back to Old Ways?
Supermarkets’ role throughout Covid-19 has been fundamental. They have had to wrestle with continuous operational challenges to adapt to evolving shopping habits within weeks not years. Are these trends likely to stay and what will the implications be on property owners and occupiers?
Coming out of the last recession, convenience and price drove occupational demand. The big four were seeking to increase market share by securing convenience locations with 3-5,000 sqft stores. Large store developments were still being planned and built but consumer trends were heading towards smaller basket, more regular frequent shops. Meanwhile Aldi and Lidl set out aggressive expansion plans to obtain market share as the consumers became more sensitive over price. Post 2008, the death knell was well and truly sounded for big format superstores, and since then very little large-scale new store development has been built in the UK. Home delivery and click and collect channels for driving supermarket sales became realistic options. As a % of total sales this represented a small proportion compared to what went through the tills (approximately 7% of total supermarket sales pre CV19).
In the transition to 'lockdown' an initial surge in sales and profits due to panic buying and people being unable to eat & drink out was evident. Supermarkets had to come to terms with dealing with social distancing and the impact on their operations on and offline. Stores dealt with limiting customers on premise and therefore sales, whilst overheads increased to ensure safety measures were in place throughout portfolios and supply chains. Data shows that consumers are reversing previous trends back to less frequent and larger spends. Will consumer spending habits be altered long term and how will this impact on occupiers physical estates? Home delivery saw exponential growth (estimates in 2020 are at 33% increase on previous year) and capacity reacted to meet that demand. Online still has a long way to go to meet customer demands, waiting for a time slot that is available and substituting items, is not ideal. Although we’re already seeing this retract back towards pre-Covid levels. Physical stores provide the opportunity to upsell and immerse customers in their brand. Indexed rent reviews are being questioned by some brands as whether this should continue to be the norm. Outside of the battle that remains between Aldi and Lidl for their 20-30,000 sqft formats there is little evidence being created to support rental growth. Why should rentals increase at the same level on a supermarket that dominated their catchment, has a good layout, delivery solution (including servicing yards capable of accommodating home delivery vehicles), ample customer parking, easy access/egress compared to one that shows none of these characteristics? Turnover rentals are something supermarkets have traditionally shunned outside of transport nodes. However, as this could become the new norm within large parts of the retail market, is this something that we could start to see creeping into negotiations going forward.
There is at present no sign of Aldi or Lidl slowing their frantic pace of growth and development. Lidl transacted on 70 sites last year and had a stated aim to beat that this year. Amazon have been gearing up to make their long awaited play in the UK food market. They have already purchased Whole Foods and recently have been acquiring personnel to boost their property team. We can expect to see some of their 'Go' convenience store format stores open before the end of 2020. Amazon are clearly well funded and expected to become a real challenger to the existing major operators. Whether Aldi or Lidl with their lack of online or pure online player Ocado would suffer most with Amazon’s arrival, only time will tell. Certainly Ocado benefited from CV19 with 42.2% increase in sales.
Operators strive to deliver high levels of customer service in this competitive market. The properties that enable operators to deliver a dominant relevant offer for a catchment will command the highest rentals and secure attractive long lease terms that drive investment performance.