Consolidation re-shapes UK retailing
- 29 Sep 2004
Author: Raphael Moreau

In 2004, the competitive environment in the UK retail market has experienced a dramatic re-shape. This re-shape has been led by the acquisition of the Safeway supermarket chain by Morrisons, which has created the country’s fourth biggest retailer and has given Morrisons the chance to pose a real threat to Sainsbury’s, in the fight for third place behind the UK’s biggest retailers, Tesco and Asda.

According to new research analysing the Retailing industry in the UK by Euromonitor International, the move towards greater consolidation will continue to impact the UK retail industry over the next five years. Euromonitor suggests that future mergers and acquisitions in UK food retailing are likely both to be on a smaller scale and to involve the take-over of convenience retailers by hypermarket chains wishing to strengthen their presence in the UK’s high streets.

Raphael Moreau, Retailing Analyst at Euromonitor International, comments "Diversifying into convenience stores is on the agenda for the UK’s top hypermarket chains because this retail format offers good growth prospects. At Euromonitor International we have seen that convenience stores have increased their share of the UK food retailing market from 20% to 21.9% between 1999 and 2003. Clearly these stores are appealing to UK consumers, thanks to their convenient locations and extended opening hours. Hypermarket retailers want to make sure they don’t miss out on this growing area of the UK market."

High Street convenience stores are also particularly attractive to hypermarket retailers, due to strict planning rules restricting the opening of new out-of town hypermarkets. It is for this reason that both Tesco and Sainsbury’s have focused on developing their Tesco Express/Tesco Metro and Sainsbury’s Central fascias. Euromonitor International believes that this trend is likely to intensify in the next five years, though Asda is unlikely to participate, as this trend would not fit the group’s current strategy. The Competition Commission, which considers convenience retailing to be a separate sector from supermarket retailing, has also encouraged this trend, since supermarket chains can diversify into convenience retailing without facing enquiries from the Commission about the market’s level of concentration

Hypermarkets, whose market share increased from 12.1 % in 1999 to 16.5% in 2004 according to Euromonitor International, will continue to grow their share of the UK market by focusing on non-food products and by continuing their price reduction strategies. Euromonitor has found that hypermarkets are already competing against mixed retailers and non-food specialists by expanding their range of products beyond food items, to focus on products such as clothes, electricals, homeware and household goods, which offer greater margins. This is particularly well illustrated by the strategies of Tesco and Asda, who continue to allocate more outlet space to non-food products.

Euromonitor believes that Tesco and Asda, who increased their combined market share from 12.6% of total retail sales in 2002 to 13.8% in 2003, largely thanks to their high profile advertising campaigns focused on price reductions, will be joined by Morrisions in the UK supermarket "price wars". The intensification of competition on price will therefore be a key trend to look out for in 2005.

More moderate growth of retail sales
Looking to the future, Euromonitor International’s latest research forecasts that UK retail sales will increase by just over 11% in real terms between 2004 and 2008, a moderate increase resulting from strong downward pressure on prices, especially within food retailing, combined with rising interest rates leading to higher debt levels. This would represent a slowdown compared to the strong performance recorded in 2003 and 2004, of 3.8% and 3% respectively, even though growth could be maintained by the dynamism of convenience stores/small grocers.