Steven Springham, Head of Retail Research at Knight Frank comments:
Another day, another set of disappointing results from one of the Big Four food store operators.
This week was the turn of Asda to provide further evidence (if any were needed) of the structural change that is engulfing the UK grocery market. Asda’s Q1 sales saw an ugly like-for-like decline of 3.9%, although profits reportedly (but non-transparently) held firm. Sales down but profits steady = significant rebalancing of the cost base. But the store portfolio has, to date at least, escaped the wider bonfire of the vanities and there was no news of significant network rationalisation. Nor were we expecting there to be, in sharp denial of the oft-quoted Goldman Sachs statistic that one in five food stores across the country must close to make the industry financially viable.
There has also been limited evidence of mass store disposals at Asda’s peers Sainsbury’s and Tesco. Much has been made of Tesco’s disposal of 43 outlets this year, but given a portfolio size of 2,800+ (or 3,800+ if One Stop is included), we’re hardly in slash and burn territory. A less-oft reported fact is that three of the Big Four are actually opening more stores this year than they are closing, albeit with much more of a focus on c-store formats than big boxes. With two Sainsbury’s Locals and two Tesco Expresses opening a week, coupled with Asda’s impending arrival into the London c-store arena (advised on two locations by Knight Frank), as many as 250 new Big Four stores could open this year alone.
Does that mean that there won’t be any more food store closures going forward? No it doesn’t. There is no denying that the sector remains under intense pressure. But the retailers’ preferred option is to find a solution to declining floor space productivity and implied profitability, rather than merely take a hatchet to the estate. Food store operators are having to re-think and re-write their business and financial models, and amidst falling sales densities, rental affordability is being re-defined. Does this make food stores a less investible asset class? Not necessarily so. By design or by default, the food stores are becoming increasingly property pro-active and sites and adjacent assets may come into play as never before.
Change can be confusing. But change also brings opportunities.