Waitrose is testing its Little Waitrose convenience format

Waitrose is testing its Little Waitrose convenience format

The major UK grocery retailers only account for some 4,000 of the 48,000 stores operating in the country's fast-growing convenience sector, making it ripe for growth - and the leading players are scrambling to build a presence in the channel.

RBS analyst Justin Scarborough says the convenience sector generated some GBP38bn in sales last year and, despite the multiples only accounting for some 6% of stores, he says they account for some 15% of sales.

According to IGD data, the convenience channel increased in value by 6.3% in the 12 months to the end of May, and now accounts for some 20.9% of the total UK grocery market. The research firm said that the channel is set to grow by some 33.6% by 2015 and that it is growing at a faster pace than the overall market.

However, some industry watchers believe that the rise of the convenience channel may be short lived, arguing that online grocery retail looks set to become the most "convenient" retail channel.

Malcolm Pinkerton, an analyst at Verdict, Datamonitor's retail arm, says the convenience channel continues to see growth, which is in part driven by changing consumer lifestyles - including more top-up shopping and the rise in single occupancy households, both of which drive convenience shopping, meal-solutions and food-to-go. However, he expects the channel to face competition from improving online grocery offers.

Pinkerton says that click-and-collect grocery retail has the potential to form a blueprint for grocers to "attain profitability in regard to online food and grocery propositions". He adds: "Any significant penetration of click-and-collect concepts will inevitably steal the convenience advantage currently held by smaller stores in the neighbourhood location".

However, statements like this have not tempered the hype around this channel, with retailers like Tesco and Sainsbury's leading the pack in terms of c-store development.

Tesco's Express and One Stop formats account for some 66% of the retailer's total UK store estate, numbering some 1,696 stores at the end of August last year.

Meanwhile, Sainsbury's has focused its store growth plans on developing its convenience network, announcing in November that it operated some 340 'Sainsbury's Local' stores as of 2 October - and that it had become a GBP1bn business. Last month, the retailer also opened its first Fresh Kitchen, its first foray into a Pret a Manger-style food-to-go concept.

Scarborough believes the major retailers are looking to develop their convenience offer simply because it is a growing channel. There is, he argues, "no fundamental reason why the supermarkets shouldn't continue to be in a very strong position against the other companies out there - in terms of price, range and quality to open stores and continue taking market share. It's a very big market and they've got a very small market share relative to their overall grocery market share".

Another driver behind the multiples moving into the convenience sector is down to out-of-town expansion becoming increasingly difficult, says Pinkerton. "Multiples' growing convenience store expansion has coincided with out-of-town expansion becoming harder to achieve," he argues. "This has forced multiples to turn their attention to new avenues through which to drive growth with the comparatively fragmented nature of the convenience food market providing ample opportunity."

While the multiples may have focused their attentions on the convenience sector, symbol groups, including Spar, Booker, Costcutter, and Nisa-Today's, continue to expand. According to IGD statistics, the symbol groups saw 7.8% growth during 2010, which Pinkerton attributed to independent retailers recruiting the new members.

Symbol groups have also risen to meet the challenges that the multiples provide, by improving their propositions with better pricing, promotions, ranges and retail standards, says Pinkerton. He adds that they are looking to project a more "consistent message" to consumers, leading to a deeper offer and an enhanced supply chain, while helping members to manage their businesses better.

The increased levels of efficiency is making the market more competitive for traditional independent neighbourhood retailers, says Pinkerton. Neighbourhood retailing is diminishing with the expansion of the multiples, improved propositions from symbol groups and the growth of The Co-operative Group, forcing uncompetitive players out of the market.

"They comprehensive offers provided by the multiples and other convenience operators are diminishing the need for traditional retailers such as off-licences, CTNs (convenience, tobacco, news) and food specialists," he says.

When considering the efficiency of neighbourhood formats, it is becoming increasingly difficult for independent operators to compete with the major multiples.

Scarborough says that the average sales density in a convenience store is GBP11.5 per square foot per week, while the supermarket operators record over GBP16 per square foot. Non-affiliated convenience operators that do just over GBP7 per square foot.

"Any business that has got that lower level of relativity in its sales density and is seeing costs go up, if that's going to happen into the future, it's just going to put pressure on profitability and the cash flows of the independent c-store operators, who might be quite willing to exit the market - if they can sell their stores to the multiples who want to get the right sorts of space," Scarborough says.

This competition is only set to continue to intensify now that Asda, Waitrose and Morrisons are joining the fray. Asda's pending acquisition of Netto's UK chain will give it some 147 stores when the deal closes in late autumn.

Meanwhile, Waitrose has begun testing a new banner called 'Little Waitrose', while announcing plans to open some 28 convenience stores this year, more than trebling its current 13-strong convenience store estate.

Morrisons, the most conservative of the UK retailers, said in September that it would trial convenience stores in the first half of 2010.

While the channel looks set to see heavy competition and increased growth in coming years, time will only tell whether the spectre of improved online offers and their increased up-take could mean that their success is short-lived.