Profit profiles are changing in the UK grocery market as superstores make floor space work harder and online profitability declines.
According to Knight Frank, the main channels of growth in the grocery market have ironically now become the least profitable, with online at one end of the extreme and ‘big box’ superstores at the other.
Online grocery sales are forecasted to grow at around 12% per annum over the next five years, however regardless of this increase profitability is still unproven. With an average £100 online order costing between £28 and £30 with in-store pickers, and expressed home delivery costing the retailer between £3 and £5, benefit for retailers is on the decline.
Despite this drain on profitability, grocery retailers are not likely to walk away from online. Unless stores charge higher delivery costs to the consumer, retailers will need to push for consumers to use click & collect rather than home delivery.
Richard Petyt, partner in the Knight Frank retail team comments; “While click & collect still carries cost, it is marginal relative to home delivery and gets the consumer back where the retailer wants them – in their stores. The click & collect charm offensive is already taking root and it is surely only a matter of time before delivery price hikes become commonplace for the diehard home delivery shopper.”
At the other end of spectrum, the very largest grocery superstores are under intense pressure as ‘big boxes’ are now witnessing rapidly declining sales. The annual growth of superstores is forecast at just 0.4% over the next five years; yet despite this, most remain highly profitable assets due to the volume and economies of scale which are most effectively realised in a large-store environment.
While few grocery superstores are likely to close, Knight Frank explain some will be downsized with space sublet to third parties, however most will be reinvented to better serve the catchment in which they trade.
Richard continues: “Existing superstore floor space will now need to work much harder and ironically, although so often pitted as enemies, both online and superstores may mutually have most to gain by fully integrating rather than operating in isolation.”