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Supermarkets turn up the heat on Home Retail

Source: Reuters - Tue 27th Apr 2010

Plans by Britain's top supermarkets to ramp up growth in non-food markets could help their traditionally defensive stocks to thrive in an economic recovery and pile pressure on firms like Home Retail and Marks & Spencer.

Tesco, already Britain's biggest non-food retailer, is best placed to grab more market share compared with supermarket rivals Asda and J Sainsbury thanks to its scale, experience and range of goods and services.

But all three should benefit from offering their millions of customers the convenience of buying keenly priced non-food goods with their weekly grocery shop, whether in-store or online, and lifting service standards towards those of specialist chains.

That could help drive a reassessment of UK food retail shares, which are currently trading at 12.7 times earnings forecasts for 2010-11, just below the average for UK non-food retailers, according to Reuters data.

"I think they can probably all win," said Verdict Research analyst Neil Saunders of the grocers' plans in non-food.

Verdict forecasts that supermarkets' share of non-food spending in Britain will rise to 14.9 percent, or 26 billion pounds, by 2013 from 12.2 percent in 2008.

"The threat in all of this is to Argos," Saunders added, referring to Home Retail's chain of general merchandise stores which are built on a model of convenience and low prices.

There are also growing risks to mid-market clothing chains like Bhs and Marks & Spencer, though the latter could be shielded by a higher reputation for quality, he said.


Britain's grocers have been pushing into non-food markets for years, attracted by higher profit margins than on groceries, and growing evidence of success during the recession has encouraged them to accelerate their plans.

Grocery specialist IGD estimates that sales of non-food items at UK grocers rose 6.4 percent last year, compared with a 0.8 percent fall at other retailers.

Asda, Britain's second-biggest grocer which is owned by U.S. retail giant Wal-Mart, last week set a target to become the country's biggest non-food retailer by building up a chain of 150 standalone Asda Living stores over the next five years.

Sainsbury said last year it planned to double its sales of non-food ranges over five years, while Tesco said on Tuesday it saw huge opportunities in general merchandise and clothing.

"The potential upside is substantial, given that these are large and fragmented markets and that the authority of our offer both in store and online is improving markedly each year" Tesco Chief Executive Terry Leahy told reporters.

Execution Noble analysts think Tesco's scale - it will have over 200 of its large format Extra stores in Britain next year, compared with about 30 Asda Supercentres - and its more ambitious expansion plans make it best placed to succeed.

They calculate Tesco will add more non-food selling space than Asda over the next three years, and more space overall than Sainsbury and industry number four Morrison combined.

Tesco, as the world's fourth-biggest retailer, can also benefit from its global buying scale and the breadth of its offer, which includes growing telecoms and financial services businesses, as well as its popular Clubcard loyalty scheme.

But not everyone is convinced it will see off its rivals.

Bryan Roberts, global research director at Planet Retail, thinks Asda and Sainsbury have a big advantage with stronger clothing brands in George and Tu respectively.

He also reckons Asda can outgun Tesco's global buying power as it works more closely with parent Wal-Mart.

Asda faces a big challenge, however, in setting up standalone Asda Living stores, which will not have the benefit of customers coming in anyway to buy groceries, and not everyone thinks it has got the formula right.

"We visited an Asda Living store but came away a little disappointed and had rather unsettling images of a store that looked a bit like a big Woolworths," the Execution Noble analysts said referring to a chain that went bust in early 2009.


Asda has long been tipped as a bidder for Home Retail as it looks to close the gap on Tesco. But its plans to build up its own chain of non-food stores have turned Asda from a potential saviour to a major threat to Home Retail's Argos business.

"In the U.S., Wal-Mart has killed off catalogue showroom operations like Argos, and in the UK, Asda seems to want to do the same" said Arden Partners analyst Nick Bubb.

While Argos has so far staved off the threat with a "multichannel" strategy that allows shoppers to buy online and collect goods in store or have them delivered to homes, grocers are now ramping up their own "click and collect" offerings.

"Argos have been stemming the tide rather than putting a lot of distance themselves and the supermarkets. They're only going to face tougher competition," said Planet Retail's Roberts.

Verdict's Saunders thinks the success of George and Tu shows grocers can create aspirational brands that will extend their appeal beyond just low prices and mass-market goods and turn them into a greater threat to more specialist retailers.

"They will trade customers up the value chain and they will take on specialists in their respective areas" he said.

He pointed to initiatives like Tesco's 1,000-strong team of technical advisers, which aims to replicate the advice provided by specialist electrical goods retailers like DSG, and to Asda's "Mother, Baby and Child" offering which will step up the challenge to specialists like Mothercare.

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