Talking shop: Does the hypermarket format have a future?
By Glynn Davis | 3 April 2012
Like many European retailers, Carrefour has struggled to grow sales at its hypermarket unit
"Soulless sheds", "beached whales" and "blips in the history of retail" are descriptions that have recently been assigned to hypermarkets, a format that seems to have taken on the persona of a dinosaur whose days are numbered. Glynn Davis takes a look at whether this once high-flying format can be rejuvenated.
The touch paper was lit by recent comments from Tesco chief executive Philip Clarke who stated that the format was no longer the focus of growth for Tesco, and the jettisoning of the Planet hypermarket refurbishment programme by the outgoing CEO of Carrefour Lars Olofsson.
We've since had a flurry of critics of the format appear. Dalton Philips, chief executive of Morrisons, suggested its rivals with big sheds will be wondering what to do with them. And Charlie Mayfield, chairman of John Lewis and upmarket grocer Waitrose, cast doubt on the future of the hypermarket.
"Over the last 30 years it was convenient for customers and profitable for retailers to put non-food alongside food in [out-of-town] space that was cheap compared with other space. But with infinite choice on the internet and new fulfilment practices this changes the fundamental commercial rationale for hypermarket developments," he argues.
So what exactly has gone wrong? There are a number of factors, according to Daniel Lucht, research director at Research Farm, who says: "The internet is playing havoc with non-food, no doubt about it, and people are not buying big things in this tough economy. Gas prices are also having an impact and there are more one-person households that are not doing big shops."
Darren Shirley, analyst at Shore Capital, agrees the problem is a mix of long-term issues like the internet grabbing increasing non-food sales and short-term effects like the need for consumers to stick to budgets and to cut down on costly petrol consumption.
Such problems have only really hit the UK over the last three years suggests David Gray, retail analyst at Planet Retail, who says Tesco was even accelerating its hypermarket openings to 15- to-20 per year after the 2008 recession.
The UK market has been helped by the fact that relaxed legislation and available space have continued to make it possible for the opening of large units of up to 11,000+ sq m. Whereas in Germany and France Lucht says the reality is that problems have been going on for years: "Carrefour has struggled for a long time and so have the German retailers like Metro with its Real hypermarkets."
In both countries there has been hypermarket saturation, which has meant the only route to growth has been through acquisition.
There has also been an issue with legislation in France that has hampered big box openings for some years. The law to protect the high streets 'loi raffarin' has made it tough to open anything over 10,000 sq m, resulting in stagnation among the incumbents. "If you can't open new hypermarkets then you can just sit tight on what you've got. Even if you've a tired old Casino the audience has been tied to you," says Lucht.
On top of this 'loi galland' is a pricing law aimed at protecting artisanal producers whereby all their branded products have to be priced at the same level by all retailers. Hypermarkets are therefore unable to offer pricing advantages over smaller stores for such products.
A recent modernisation of these two laws has: made it easier for the opening of discounters in tighter space; fuelled the development of more own-label goods; and led to the emergence of more convenience stores. There has therefore been an influx of new competition for the hypermarket operators who if they react with smaller formats inevitably cannibalise their core businesses.
This uncertainly with the format has led to the departure of Olofsson at Carrefour and possibly had a part to play in Joel Saveuse leaving as head of Metro-owned Real that is currently being considered for sale.
But it is not all bad news. Gavin Rothwell, UK research manager at IGD, says: "Despite these challenges, there are some hypermarkets that continue to perform strongly and there is significant variation on a store-by-store basis, depending on location and retailer."
Among the stronger performers is Kaufland that Lucht says "marries the efficiency of discounters with brands at good prices and its own-label range K-classic". But even this operator is moving its model away from 10,000 sq m boxes to 3,000-to-5,000 sq m units.
Auchan is also being held up as a hypermarket success - with its top stores generating EUR300m (US$399.16m) and an average across its estate of EUR120m per year - but even here there has been less than 1% year-on-year growth (including petrol).
It is joined in the relative-success camp by E.Leclerc that is on track to take over from Carrefour as the biggest French retailer as it benefits from its co-operative structure that enables its individual store managements to better focus on the local customer base. This has been a feature of Globus in Germany that has sought to bring in plenty of regional brands to compliment the national product lines it stocks.
What has benefited both French operators Auchan and E.Leclerc is their opening of Drive Click & Collect formats, whereby customers buy their groceries online and collect them at a specified store. The latter now operates 149 such units, while Auchan has opened 47 Drive units that are attached to its hypermarkets and 40 standalone Chronodrive stores. These contribute to the almost 900 Drive stations that now operate throughout France.
This is a new phenomenon and could represent the future for hypermarkets as they tap into the inexorable move by retailers and consumers towards multi-channel shopping. Rothwell says: "Retailers who have embraced the multi-channel opportunity have, in general, received a boost to top-line sales. The success of the Drive click and collect format in France is one such example."
The problem with this service is that it does not address the long-term issue of the increasing amounts of non-food goods being bought online, which will put into question how retailers utilise the mass of space in their hypermarkets.
Shirley suggests: "I'd not be surprised if Tesco downsizes some of its stores by getting concessions in. They could re-assign 30,000 sq ft to other retailers and services."
Michael Poynor, managing director of Retail Expertise and global retail advisor to PWC, also points to the fact that since large units can no longer be built in France and Germany, and new planning laws are also making it tougher to do so in the UK, there could be some rarity value in existing hypermarket sites.
"Hypermarkets are not what they used to be but that space has a value because you can't replicate it any more," he suggests.
But what exactly you do with this hunk of potentially unnecessary space has not yet been solved and so the jury remains out on whether the hypermarket really will be a beached whale that becomes a blip in the history of retail as the naysayers predict.
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