Neighbourhood shops: the new retail winners

Citation

(2006), "Neighbourhood shops: the new retail winners", International Journal of Retail & Distribution Management, Vol. 34 No. 3. https://doi.org/10.1108/ijrdm.2006.08934cab.001

Neighbourhood shops: the new retail winners

Neighbourhood shops: the new retail winners

2006 sales growth per square foot in the neighbourhood to outstrip high street and out-of-town retailers for the third consecutive year.

In London, neighbourhood shops are growing sales per square foot faster than their high street or out-of-town rivals, as supermarket operators build up their small store portfolios. This is according to a report just published by retail analyst, Verdict Research. “The arrival of the major grocers into the neighbourhood arena is driving improved sector performance as players transfer their expertise in superstore retailing, enhance ranges and make prices more competitive,” says Nick Gladding, retail analyst at Verdict Research. “Existing convenience store operators have been forced to fight back by increasing their own standards in order to remain competitive. What's more with Tesco's formidable track record of growth, it is hard not to see Spar being forced to relinquish its crown during 2006.” Is all lost for convenience store retailers? Not so. Verdict Research points to the fact that they have forged closer ties with the local community – something the major grocers have yet to achieve.

According to the report, Neighbourhood Retailing 2006, average sales densities across the neighbourhood grew two thirds faster than total retail in 2005 and are now – at £527 per sq ft – 20.1 per cent higher than the equivalent figure across retail as a whole. Sales per square foot has improved further as weaker players – who typically trade on lower sales per sq ft – continue to drop out of the market as supermarket operators muscle in.

Oil companies give up on mainstream retailing?

Though convenience store forecourt retailing is already well established thanks to the activities of the major grocers, it is set to grow further as major oil companies look to offload company owned sites and refocus on fuel wholesaling. In 2005, this shift has seen Somerfield purchase almost 150 sites (mainly from Texaco) and M&S enter into an agreement with BP to introduce its Simply Food format on a trial basis into seven forecourts.

Forecourt convenience store retailing remains a relatively unexploited market and has considerable advantages to boot. High levels of footfall and car-borne customers provide an opportunity to increase basket sizes as shoppers are able to carry away bulk purchases more easily. And forecourts boast a relatively captive audience, who are less inclined to comparison shop than in other locations. These inherent advantages represent a solid platform for further store development and will be a key avenue of growth for the major grocers going forward.

Tesco moves towards neighbourhood market leadership in 2006

Tesco has achieved the largest market share increase of any retailer in the neighbourhood in 2005. Verdict Research estimates that Tesco increased its VAT inclusive neighbourhood sales by £200 m to £2.4 bn in 2005 – lifting its market share by 0.4 percentage points to 5.4 per cent. The retailer has made considerable inroads into the neighbourhood since entering the market five years ago, as it built share through a combination of strong organic growth of its Express format and acquisition-based growth. According to Verdict Research, Tesco now lies in joint second place with Irish operator Musgrave (owner of Londis and Budgens) and is just 0.2 percentage points behind the market leader Spar.

Table I shows market shares of the top five neighbourhood retailers in 2005.

“While it is likely to face a stronger set of rivals, Tesco has successfully replicated its success in large format retailing into convenience stores in the neighbourhood,” says Gladding. “Its closest rival – current market leader Spar – is predominantly a franchise operation, with limited control over individual stores making it harder to deliver sales growth initiatives. With Tesco's formidable track record of growth, it is hard not to see Spar being forced to relinquish its crown during 2006.”

Retailer	Percentage of share
Spar	5.6
Tesco	5.4
Musgrave	5.4
The Co-operative Group	5.2
Somerfield	3.3

Note: Market shares of the top five neighbourhood retailers 2005Source: Verdict Research

Table I.

Yet Verdict Research also sees considerable opportunities for other convenience store retailers in the £44.1bn neighbourhood market. The firm points to opportunities in developing a stronger service offer, through more in-store ATMs, DVD rental kiosks and bill payment services.

“With a strong local heritage, convenience store retailers need to actively advocate themselves as a hub of the local communities they serve,” says Gladding. “Promoting local events and developing product ranges and services that cater for the immediate population will enable them to forge closer ties with the local community – something the major grocers have yet to achieve.”

For further information about the report, Neighbourhood Retailing 2006, contact: Anne Bourgeois. Tel: (+44) 20 7675 7487, e-mail: pr@verdict.co.uk or Nick Gladding, Tel: (+44) 20 7675 7703/(m): 07740 463121