Tesco’s ‘plan’ for bigger stores may be step in wrong direction

Speculation about Tesco ‘Plus’ hypermarkets seems misconceived. Either that or Tesco needs a serious strategic rethink.

Tesco’s decision to extend the size of its store in Pitsea, Essex from 75,000 sq ft to 90,000 sq ft shows how far supermarket retailers will go to improve the yield from their larger stores.

The company denies reports that it is launching a chain of hypermarkets and rules out giving the newly enlarged Pitsea store a separate branding. It says the new store is being referred to as a superstore. It denies the store will be called Tesco Plus, or that there will be a food court wth six different operators.

But the move does highlight how the superstores are looking to drive growth from their larger stores.

The question for the retailers is how to make their larger outlets – those over 50,000 sq ft – perform better. There is only a certain amount of food that can be offered in one store. Food and drink have suffered from low margins over recent years, and most of the superstore operators are looking outside the food arena to build profits and margins in the future. Clothes, petrol and home entertainments are the areas that the supermarkets are entering to increase sales – though these are all highly competitive areas which have been hit by price cutting over recent years.

Asda has come up with a new format in 11 of its stores, which are in the process of being branded as Asda Hypermarkets.

They have more than 65,000 sq ft of floorspace and are situated on arterial routes. They have wider catchment areas than the standard Asda stores, and wider ranges of non-foods such as clothing and home and leisure. But, from the consumers’ point of view, these are just larger versions of the standard Asda store. A spokesman says: “The average shopper probably wouldn’t be able to tell the difference between the average Asda store and one of our hypermarkets.”

He says Asda is examining plans to extend the floor space of other stores to bring them up to the size needed to convert them to the hypermarket format, if this proves possible. Analysts say Asda is looking for its larger stores to provide a significant slug of its profits growth over coming years.

Tesco’s philosophy is to have differentiated store formats for various sections of the market. Tesco Metro is akin to a high street convenience store, while Tesco Express is a petrol and retailing concept. If the chain decided to rebrand some of its larger stores under the Tesco Plus banner, it would be to show consumers the difference between this format and the standard Tesco stores. However, it could also confuse consumers, who may believe they were getting something a standard Tesco superstore does not offer. They would be disappointed to find the store just the same.

One thing that might deter Tesco from launching into hypermarket retailing is its unhappy history in the UK. In France, Germany and other European markets the hypermarket is one of the most successful retail formats. But Savacentre, the UK’s only hypermarket chain, has not been particularly successful. Last year, for example, Savacentre’s parent, J Sainsbury, revealed that the hypermarket chain’s profits had been badly dented by the price war on petrol.

The last financial results for the six months to September 21 show sales increasing 10.8 per cent to 415.7m, but like-for-like in-store sales were just 1.6 per cent ahead. Operating profit fell nearly a quarter to 14.4m.

One problem faced by Savacentre is that it was first set up as a joint venture between Sainsbury’s and Bhs. Robert Clark of retail analyst Corporate Intelligence says: “Savacentre has not been very successful. It has been neglected as a format, partly because it was a joint venture. Its history was, in hindsight, unfortunate, and it is now running against problems.”

Planning permission on new store developments is becoming increasingly difficult to obtain after the Government decided building out-of-town stores had gone too far. The Labour Party has now said it will adopt a similar policy if it wins the election, so there are few new opportunities for building bigger stores. Marks & Spencer, Sainsbury’s, Tesco and Asda are all adding floor space to existing stores in the absence of being able to build new stores.

By increasing the amount of non-food items it sells at its larger stores, Tesco expects to be able to increase its sales per square foot. This is a crucial measure of its relative performance to Sainsbury’s. Tesco’s sales per square foot are roughly 16, compared with 17 at Sainsbury’s.

Trying to get higher sales from each store is vital for Tesco in its battle with Sainsbury’s for UK supermarket retailing supremacy.

But Tesco should beware of following the Savacentre hypermarket route, as this could leave its larger stores vulnerable – not only in price wars on food, but also in petrol, clothing, home entertainment and furnishings.

Knowledge Bank

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