Bibby Line hailed the convenience retail sector as a “great opportunity” in the wake of its acquisition of major player Costcutter. However, can Costcutter stand up to the will and spending power of supermarkets, which have also recognised the opportunities c-stores offer? just-food explores the issue.
This week saw a major development in the UK convenience sector as Bibby Line Group announced its full acquisition of UK retailer Costcutter.
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Bibby Line, which has a diverse portfolio that includes shipping, logistics, marine manufacture and even woodland burials, released a statement calling the convenience retail sector an “excellent long-term prospect” following the completion of the purchase.
This opinion is shared by industry analysts at IGD, which last week released a report forecasting that the UK grocery convenience retail sector is set to grow into a GBP42.2bn (US$66.4bn) industry in five years’ time, an increase of a quarter on its current value.
The growth is down to the trend for top-up shopping, where shoppers cut back on big weekly or monthly shops because they feel they are buying in bulk and want to cut the food they waste, becoming what Morrisons chief executive Dalton Philips recently called the “professional shopper”.
Sir Michael Bibby, chief executive of Bibby Line, told The Times the Costcutter acquisition would give the retailer an opportunity to take on the supermarkets’ buying power. Sainsbury’s and Tesco have a big convenience presence and Morrisons and Asda are following suit, so can Costcutter really compete with the sheer purchasing might of the ‘big four’?
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By GlobalDataYes, according to Cliona Lynch, senior retail analyst at Verdict Research. “Costcutter has good grounds to compete with the big four. It’s largely down to their supply chain as they need to offer good prices to their members”, she said.
In the wake of the acquisition, Bibby Line will need to review how its stores are supplied. Costcutter currently has a supply deal with Nisa, which will run until 2014, but Lynch feels Costcutter, backed by Bibby Line, has the heft to compete with wholesale leader Booker by either buying an existing operation or setting up its own. Bibby Line has set up a subdivision called Bibby Retail Services, which Costcutter chief executive and founder Colin Graves will run.
Lynch said: “I think it’s interesting they haven’t named the subdivision Costcutter as it could show they are willing to expand more into other areas like wholesale.”
She added that Bibby Line’s existing warehouse and logistics arm gives it the resources, experience and expertise needed to enter the wholesale sector.
But one UK retail analyst wholeheartedly disagrees with Lynch’s assessment of Costcutter’s chances, saying that the cost efficiencies and distribution networks wielded by supermarkets will be difficult to compete with, even though they currently only have an approximate 15% of the market.
He said: “Other convenience players should be very, very wary. With Waitrose entering the market, as well as interest from Marks and Spencer, it’s set to become even more competitive.
“It’s exciting that the sector is still fragmented, but when you look at the rate at which the convenience sector growing, it’s no surprise the supermarkets want to be there.”
He added that whichever company buys frozen food chain Iceland Foods (a majority stake in which is currently up for sale) is likely to sell of individual outlets, which will allow supermarkets to cherry pick prime locations for c-stores.
Lynch thinks that Costcutter will not seek to acquire any rivals in the near future as there are still enough independents to bring into the fold, especially as many of them will feel under pressure from the supermarket’s expansion and will seek the protection of symbol retailers like Spar and Costcutter. IGD’s figures from June 2010 show that 41.5% of the convenience sector is still in the hands of independents.
However, Lynch feels it is not all doom and gloom for independents. She points to the differentiating qualities of independent outlets compared to supermarkets’ convenience stores, such as a trusted reputation, fresh food and deli offerings and a high level of customer service. All of these elements will help independents secure their survival, Lynch says.
As well as supermarkets, convenience faces losing ground to online shopping, a growing trend in the UK. In January Malcolm Pinkerton, an analyst at Verdict, said he expects the convenience channel to face competition from improving online grocery offers, a trend demonstrated by yesterday’s news that online retailer Ocado has launched its first supermarket app for Blackberry phones.
But Lynch believes online shopping will actually play to the convenience sector’s strength.
She said: “If anything, I think it will benefit from online shopping. People will do their ‘big shop’ online and then top up at convenience stores.
“Impulse purchases are important as well. People will still go to the shop for a chocolate bar – they won’t do that online.”
