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RETAIL TRENDS

March 2015

© MONTAGU EVANS LLP 2013 SOUTH AYRSHIRE COUNCIL – RETAIL TRENDS

CONTENTS

SECTION 1 – INTRODUCTION SECTION 2 – REVIEW OF KEY RETAIL TRENDS SECTION 3 – FUTURE FOODSTORE DEVELOPMENT STRATEGIES SECTION 4 - POLICY IMPLICATIONS

© MONTAGU EVANS LLP 2015 SOUTH AYRSHIRE COUNCIL – RETAIL TRENDS 1

1. INTRODUCTION

INTRODUCTION

Montagu Evans LLP have been commissioned by South

Ayrshire Council to prepare a report which examines key

retail trends, occupier and developer strategies with a

particular focus on foodstore operators, their current

requirements and development intentions.

To undertake this review we have relied on a range of

information sources, together with our experience of

delivering major retail led schemes – and especially in the

context of advising local authorities on their delivery. In

recent years many of these schemes have included large

foodstores.

The conclusions of the report draw together these key retail

trends and high level implications for policy for retail

development.

KEY TASKS

In order to meet the aims of the study we have undertaken the

following key tasks:

Research into retail trends, drawing on published

research, property databases and in-house knowledge of

this sector

Review of current foodstore requirements based on

logged retail requirement databases.

Review of publically known press and trading statements

by foodstore operators.

Preparation of recent and relevant Case Studies.

REPORT STRUCTURE In order to achieve the core aims of this review, this report is structured as follows:

Section 2 – Review of Key Retail Trends

Section 3 – Future Foodstore Development Strategies

Section 4 - Policy Implications


2. KEY RETAIL TRENDS KEY RETAIL TRENDS

Retail Centre Performance and Vacancy Rates

In recent years there has been flight to quality, with many retailers typically favouring a strategy of

representation in the top 25 - 50 or so retail locations in the UK. Generally speaking, larger more

robust city centres have retained their attraction to retailers and shoppers, with mid sized centres

suffering from higher levels of vacancy. There is though considerable regional variation, with centres

in the south east and London have generally performed better than those elsewhere in the UK. As at

January 2014, average UK high street unit vacancy rates stood at 12.2%; in London this figure was

8.1% while Scotland’s vacancy rate was 13.7% (Local Data Company).

Town Centre v Out of Centre Locations

Since the mid 1970s there has been a shift toward a much greater proportion of new retail

development being located at out of centre rather than town centre locations. Statistics from DCLG

(2007) show that in the 1970s almost 65% of new retail floorspace in England was in town centre

locations. By 1994, it accounted for only 14% of new stock. While there has been some increase in the

amount of retail development being located in or on the edge of two centres since the mid 1990’s

(33% in 2007: DCLG), the trend continues to be skewed toward more retail development being

promoted at out of centre locations - in 2014 60% of retail schemes were being promoted in out of

centre locations (Estates Gazette, 2015).

In part this approach reflects the demand for retailers to take up out of centre retail space – vacancy

rates in 2014 for UK retail parks was 8.9% (Local Data Company); far lower than the UK high street

average of 12.2%. Out of centre developments are often considered more attractive for a number of

reasons including typically strong accessibility characteristics (especially by car), plentiful free (often

surface) car parking and the availability of modern large and well configured retail units. Nor do out

of centre schemes suffer the delivery constraints of town centre schemes where land assembly and

associated costs often typically make scheme viability much more challenging.

This preference for out of centre space is reflected in many retailer strategies. Marks & Spencer, for

example, have very few new major stores in the pipeline, but where being promoted it is favouring

out of centre locations – for example, the out of centre Banbury Gateway development includes a

100,000 sqft+ Marks & Spencer store. Next have taken a similar approach, principally targeting out of

centre locations for their fashion and homeware offer. John Lewis too now has an out of centre/retail

park shopping format.

For Ayr, and whilst only a snapshot of demand, according to retailer requirements logged on Egi,

around 47% of retailers state a preference for edge of town / out of town locations, and c.53% for in

town / shopping centre locations.

Retail sales

Retail sales have increased for 22 consecutive months to January 2015 (ONS, February 2015). The

table below describes the comparative growth in retail sales between foodstore and non-foodstore

retailing destinations for the UK.

Year Foodstores* (% YoY Change) Non-Foodstores* (% YoY Change)

2006 81.2 (3.5%) 94.3 (1.4%)

2007 84.7 (4.4%) 97.3 (3.2%)

2008 89.9 (6.0%) 98.2 (0.9%)

2009 94.6 (5.2%) 96.3 (-1.9%)

2010 96.0 (1.5%) 98.9 (2.6%)

2011 100.0 (4.2%) 100.0 (1.1%)

2012 103.0 (3.0%) 101.7 (1.7%)

2013 106.2 (3.1%) 103.4 (1.7%)

2014 107.2 (1.0%) 109.2 (5.6%)

Source: ONS, 2015.. *Index; 2011 = 100

In January 2015 for every pound spent in the retail industry: 42p was spent in foodstores; 41p was

spent in non-foodstores; 6p was spent in non-store retailing; and 11p was spent in stores selling

automotive fuel. Foodstores are clearly a very important element of our retailing pattern in the UK

today. There are however signs that expenditure in foodstores is beginning to slow, as illustrated by

the lower 2014 growth figures since 2010, and especially in 2014.


2. KEY RETAIL TRENDS Retailing and Technology

Statistics from the ONS illustrate the strong rise in UK internet based retail sales. The expectation is

that this trend will continue, with other forms of technological advance in multi-channel retailing

becoming noticeable; for example an increase in mobile shopping.

Allied to this, consumers are faced with a far greater diversity of shopping choices – local, out of town,

town centre, service station, online, click and collect, TV shopping, mobile shopping, airport retailing,

station retailing. The diversity of retail channels is increasing all the time.

UK Internet Sales as a % of Total Retail Sales

Source: House of Commons; Retail Statistics and Policy 2014

Retail Growth Sectors

In recent years, certain retail sub-sectors have performed better than others. Of note:

Comparison retailing – the value orientated retail market has grown considerably, with occupiers

such as Primark, 99p Stores, Poundland and Wilkinsons all expanding quickly. In many cases, these

retailers have taken advantage of a spate of vacant units appearing on high streets together with a

much more expenditure conscious shopper.

There has also been a trend of increasing demand for higher quality fashion led goods and luxuries.

In recent years the combined pressure of both luxury oriented retailers and growth of the value

sector resulted in the middle ground retailers being squeezed in the market, although there are

signs that this trend is abating.

Service Sector uses – some sub-sectors in this category have weathered recent times better than

others. Obvious examples of growth include the proliferation of betting shops and pawn brokers.

Others service sector retailers such as travel agents have faced a much stronger challenge

especially from the growing use of the internet.

Restaurants, Cafés, Coffee Shops – this sector has seen very rapid growth. It has been more

resilient through the recent economic downturn, with the UK’s economic fortunes doing little to

dent people’s appetite for leisure and eating out. Branded coffee shops have for example become

far more prevalent in the heart of city and town centres, rather than perhaps more traditionally

being found in secondary or off pitch locations. Many shopping mall extensions now include a

bigger and better leisure and eating out experience.

Although not retail uses, leisure activities have become a wider part of the shopping and retailing

experience. Cinemas for example have seen a considerable growth. The number of screens in the UK

has risen from around 3,000 screens in 2000 to close to 4,000 in 2010 (Terra Media, 2012). The health

& fitness sector has also seen a surge in growth. According to the 2013 State of the UK Fitness

Industry Report, this sector now accounts for almost £4billion of expenditure. Over 12% of the UK

population are now members of a private health & fitness club.


2. KEY RETAIL TRENDS GROCERY RETAILING TRENDS

In the grocery retailing sector there are number of key trends apparent:

Foodstore development. The pace of development has begun to slow significantly. The

adjacent graph highlights this, plus demonstrating the extent to which foodstore development

generally occurs at out of centre locations. Recent development strategies have been focussed

on convenience store rather than supermarket development.

Convenience store growth. There has been a notable shift in grocery retailing patterns. A

convenience store is typically regarded as a store with less than less than 3,000 sq ft]. IGD

research shows convenience multiples have seen the largest increase in store numbers, up

13.6% year on year (2014). Social and economic changes are helping to deliver growth in the

convenience market. Changes such as smaller household sizes, longer working hours, and

reducing food waste are playing to the strengths of the convenience stores. Grocery shopping

evidence also points towards a growing trend of shoppers shopping more frequently and

purchasing less on each trip (IGD 2012). With the changing shopper patterns, so has there

been a change in the retail strategies of foodstore operators. This is explored further in Section

3 below.

Discount grocery retailing. Partly driven by tightening household budgets, there has been a

strong growth in the discount foodstore market. Front runners are Lidl and Aldi, although

others are present as well as some limited grocery products that can be found in value oriented

comparison stores such as Poundland, B&M and 99p stores.

Alternative (multi) grocery channels - Click and collect grocery shopping allied with the

increase in internet shopping has resulted in a significant shift in retailing patterns. In some

cases the growth of this style of shopping has been so great that the foodstore operators are

developing dark stores (stores which are developed to solely meet internet retailing customer

needs). Dark stores are generally located in industrial areas rather than in city or out of town

retail parks.

Grocery Development: 2002 – 2014

Source: Construction Week/ CBRE/PMA, 2015


2. KEY RETAIL TRENDS FOODSTORE REQUIREMENTS

Foodstore operator requirements are often logged on retailer requirement databases. The table

below outlines these as drawn from Egi.

Grocer Min area (sq ft)

Max area (sq ft)

Comment

Aldi 3,237 16,187 Aldi also have a ‘walk in format’, but typically store size required is 10,000 – 15,000 sq ft with surface parking.

Asda 26,135 N/A While no maximum figure is shown, a typical upper size for Asda is 80,000 sq ft.

Iceland 3,000 10,000 -

Lidl 4,500 19,000 Lidl have a ‘walk in’ format but focussed only on UK south east area. Typical store size required is 12,500 – 17,500 sq ft with surface parking.

M&S Simply Food 4,047 N/A While not explicitly stated, M&S can operate their Simply Food format from larger stores.

Morrisons 15,000 70,000 A broad size range is shown Morrisons though tend to have a fairly rigid store supermarket size of around 60,000 – 70,000 sq ft with parking. The ‘M’ store is the operator’s smaller convenience store format.

Sainsbury Local 2,500 9,500 No parking typically required.

Tesco Express 3,200 4,000 Tesco has a wide range of store formats, the Express figures are shown here, representing the smallest of these. A Metro store can for example extend up to c.15,000 sq ft.

Waitrose 15,000 43,000 The figures detailed here are for the supermarket format. Waitrose also have a much smaller walk in format for high street locations of below 3,000 sq ft.

Source: Egi. 2015 Floorspace areas understood to be gross requirements.

While the adjacent table does provide a strong flavour of the scale of requirements from individual

operators, some caution must be placed on this high level information. In particular the appetite for

foodstore operators to develop larger supermarkets is presently very muted even though in some

cases larger store requirements continue to be stated. The foodstore operator strategies are detailed

further in Section 3. Below however is a review of recent experience with marketing major

development sites across the UK, with a focus again on foodstore attitudes toward these

opportunities.

FOODSTORES AND DEVELOPMENT OPPORTUNITIES

The strategic shift towards convenience store development rather than supermarket development by

the larger, mainstream foodstore operators has impacted on retail development schemes. This is

illustrated by reference to two key case studies below.

Case Study 1: Carlisle, Morton. In 2012 this prime site was marketed by the City Council for major

supermarket development as part of an opportunity which would support a wider urban extension.

In 2012 four of the major foodstore operators responded positively to the opportunity. Tesco was

selected as preferred partner by the City Council. However, by 2013 Tesco stated that they no longer

were interested in the opportunity. The site was then offered back to the foodstore underbidders in

late 2013 / early 2014, but no interest was then received.

Case study 2: South East UK location. In 2013 we sought bids from foodstore operators for large

supermarket opportunity on behalf of an educational establishment. Only a single bid was received,

and this was only on the basis of an option agreement - and that a concept store would be

developed.

From other retailer / foodstore demand surveys we have conducted for sites across the UK in

2013/2014 there has been no positive response from operators for larger supermarket formats. This

marks a sea change in operators’ appetites for sites: prior to 2013, many major mixed use town

centre schemes were anchored by large supermarkets. Examples of these include schemes in

Farnborough, Aldershot, Bicester, Blackpool, Penrith, West Bromwich and Newark among many

others. These schemes all included foodstores of over 60,000 + sq ft.


3. FUTURE FOODSTORE STRATEGIES

In this section a summary of key, publically known information, statements and press releases is

provided for the main grocery operators. This provides an further overview and insight into current

grocery strategies in terms of development ambitions, target markets as well highlighting their recent

trading fortunes.

The collated information focusses on the major foodstore operators – Asda, Morrisons, Tesco,

Sainsburys and Waitrose – as well as the key discount operators. It is recognised that these are not

the only players in the grocery market (others include the Co-op, Iceland, Farmfoods, Londis,

Costcutter, Marks & Spencer and Whole Foods among others), but they account for a very large part

of the market share and provide a strong barometer of grocery activity and development strategies.

In preparing this paper – and collating the information below – it is recognised that development

strategies by operators are regularly reviewed and can be subject to change. There are however

consistent current messages that are apparent from the information gathered for the short to mid-

term. These are:

Weakening trading results from the major foodstore operators.

The very significant slowing down of superstore development by the major food operators -

and in the case of Tesco, Sainsbury and Morrisons an almost complete halt to development

of this type of larger foodstore format in the short to medium term (0-3 years).

Closure of less profitable stores

The more ambitious growth plans associated with discount foodstore operators.

The clear strategies of grocers focussing on the development of smaller convenience stores.

This principally relates to the major foodstore operators’, but is also an emerging and

growing trend with discounters too.

A move toward more diversified approach to meeting customer needs, especially internet

based ‘click and collect’ and home delivery services.



ASDA

In April 2014 Walmart announced that Asda will expand further in the South and South East where

it has fewest stores. As much as 65% of Asda’s new space in the next five years will open in the

East, South East and London.

Asda intends to double the amount of space it opened in 2014 to around 740,000 sq ft annually

from 2015. Most new stores will be less than 25,000 sq ft. Asda is embarking on a major

expansion of its smaller-format stores as supermarkets step up the race for convenience store

space. In addition, the supermarket chain wants to develop 100 petrol stations and 1,000 more

click-and-collect points across the UK.

In February 2015 Asda detailed its planned investment of £600m this year, and targeted the

opening of 17 new stores. The new stores will be split between large supermarkets and smaller

ones, with 10 of the latter planned. Three supermarket stores will be in London. In addition, there

will also be an upgrade of existing stores - 62 stores will undergo a major remodel to reflect

changing shopper habits. 150 remote Click and Collect sites will be also created and 36 petrol

stations will open. An overhaul of the Asda brand is also planned. (Estates Gazette, Feb 2015).

Its chief executive officer, Andy Clarke, has warned of an “incredibly challenging market” this year

and next (Estates Gazette, Feb 2015).

Financial Results: Fourth quarter and full-year financial results for 2014, reported a 1% fall in like-

for-like sales for the year to 31 December, and a 2.6% fall in the 12 weeks to 4 January.

MORRISONS

In March 2014 Morrisons strategic update (3 year plan) included:

Acceleration of new channel development - online and convenience

Planned exit from non-core activities, including Kiddicare and Fresh Direct

Property review completed with new space development pipeline reassessed

In May 2014 Morrisons stated that 10 unprofitable supermarkets were set to be closed. The stores

– supermarkets in Northumberland, Lancashire, Yorkshire, Merseyside and the West Midlands –

included just one site in the South of England (Crawley).

Morrisons opened 46 Convenience (M stores) in 2014. However, in November 2014 Morrisons also

announced the closure of 6 convenience stores whilst also pulling out of a deal to acquire 40 other

sites. [There is no explicit public statement available regarding Morrisons foosdstore /

supermarket development strategy, though we are aware that their development programme has

all but been suspended].

Morrisons has been undertaking a number of sale and leaseback if its estate Morrisons is preparing

to put a second tranche of assets up for sale as the supermarket sector remains in a state of flux.

Financial Results: For the year 2013 / 2014 Morrisons announced a pre tax loss of £176m. More

recently for Q4 2014, and full-year financial results for 2014, the company reported a 1% fall in

like-for-like sales for the year to 31 December.



SAINSBURYS

Sainsbury’s Q3 Trading Statement, to Jan 2015 notes that the trend for more frequent and local

shopping continues. It also details that over next 5 years Sainsbury’s predicts that around three-

quarters of its store portfolio will have underutilised space. Effective use of this supermarket

space likely to include concessions to other retailers: Argos (digital store format) is to be trialled at

10 stores. There is also the potential to increase presence of in house clothing brand (Tu).

Over next 3 years Sainsbury expect to open:

8 new supermarkets

4 replacements

Around 100 convenience stores per year

Of the eight new supermarkets, it is understood three of these are to be part of a strategy of

releasing site value through mixed use development. In November 2014, Sainsbury stated that, as

a result of a review of their property market estate, the company decided to withdraw from a

number of schemes (40) in their property pipeline.

Sainsbury’s new grocery floorspace development projections are reducing year on year:

2014/15: 750,000 sq ft

2015/16 & 2016/17: 500,000 sq ft

2017/18: 350,000 sq ft.

Only 2 new Sainsbury supermarkets were opened in 2014/15, yet 118 convenience stores were

opened for the same period. No new supermarkets were developed in Scotland during that

period.

Financial Results: Sainsbury’s announced a £290m half-year loss after writing down the value of

its existing estate by £341m. The cost of halting development of 40 new stores is almost £300m.

TESCO

In January 2015 Tesco stated that it will close 43 loss-making stores in the UK. While the axe will

mainly fall on smaller Express and Metro outlets, Tesco is also cutting half – six – of its non-grocery

Homeplus stores and seven superstores.

Tesco has also dropped plans for 49 new developments. A number of these pipeline stores are in

Scotland. The retailer is reducing the number of stores as it seeks to cut costs, and is focusing on

the convenience part of the market.

Examples of the extent to which Tesco has stopped new foodstore development even includes

circumstances where they have built the store, but will not operate from it (Chatteris), or where

they have undertaken significant land assembly and enabling works as part of a wider regeneration

scheme (Dartford).

Tesco received approval for 1.09m square feet of new retail space last year (2014), well below its

average over the previous four years, according to data from researcher Glenigan.

Tesco also stated that in May 2014 it would take over the running of cafes in 300 of its largest

stores to attract customers back. In 2014 it began opening some restaurants in its stores (Tesco

purchased Giraffe restaurant chain in 2013).

Financial Results: The announcement regarding store closures and no-development of

supermarkets came as Tesco revealed that sales fell 2.9% in the 19 weeks ended Jan 3rd 2015, and

were down 0.6% in the six weeks that comprised the Christmas shopping period. (Guardian 2015)



WAITROSE

In March 2014 Waitrose stated that it planned to open 38 branches for that year, including 23

“little Waitrose” sites. In 2015, the target is lower with Waitrose to open 14 stores, including

seven supermarkets and seven Little Waitrose convenience stores. The supermarkets will open in

Wollaton, Nottinghamshire; Milngavie, East Dumbartonshire; Bagshot, Surrey; Oxford; King’s

Crossl; Basingstoke, Hampshire; and Guildford, Surrey. It is also relocating one supermarket and

carrying out two major extensions to existing branches.

Together, the development pipeline will add almost 230,000 sq ft of selling space to the estate,

continuing the Waitrose expansion of recent years. [NB the Waitrose foodstore format is typically

smaller than is competitors, at around 25,000 – 35,000 sq ft gross)

Financial Results: Supermarket chain Waitrose has reported a drop in sales for a number of weeks

in 2014 compared to the same period a year ago.

DISCOUNTERS

In November 2014 it was reported that Aldi wants to almost double the number of its UK stores to

1,000 by 2022. Aldi is to invest £600m in the UK, mainly in new stores, over the next two years.

In February 2015 Aldi announced plans to open 70 stores throughout the UK this year. This store

opening plan will add to its current portfolio of 560 shops, taking the total to 630. Aldi, which had

1.13m sq ft of new space approved, is continuing to expand the number of “traditionally sized

supermarkets [which are generally 12,500 – 15,000 sq ft].

Lidl plans to spend £170m this year on opening new outlets and installing bakeries within existing

sites. In June 2014 Lidl stated that the company will open 40 new stores every year as it improves

its position in the UK market. This is a very considerable increase – up from an annual target of 15-

20 stores per annum. The dramatic expansion plans would see the grocery deep discounter grow

from 600 UK outlets to 1,500 over the longer term.

Financial Results: According to information firm Neilsen (Jan 2015) Aldi and Lidl now account for a

combined market share of 10.7%. The combined sales of Aldi and Lidl are set to top £10bn this

year, overtaking Morrisons (Financial Times, July 2014).


4. POLICY IMPLICATIONS POLICY IMPLICATIONS

There are a number of high level implications – and potential policy considerations that arise from the

key findings from this study. The focus of the comments is made toward current foodstore strategies,

though a number of other high levels points are made.

The short to mid-term policy implications from the shift in the grocery development market and

broader retail trends are:

That for many years, major foodstore development was considered a key anchor and value

driver to delivering both town centre regeneration schemes and for cross funding

infrastructure for residential led schemes. This approach can no longer be relied on.

Where large supermarkets already exist (or are committed to), there may be moves by the

operators to diversify the existing floorspace to include other uses, such as leisure,

restaurants and cafes and more comparison goods. Where this occurs, any impact on town

centres may need to be carefully assessed and managed.

That the move toward growth in convenience grocery shopping has enabled the reuse of

some vacant units in town and city centres. Such uses can provide greater diversity, vitality

and retail choice. It may also support the presence of other uses, such as residential

development.

Partly as a result of the general reduction in demand for comparison and foodstore town

centre retail space, developments often now include a significant element of leisure

oriented uses, including cafes, restaurants and typically anchored by a cinema or other

leisure uses. In appropriate retail locations policy may be needed to encourage this form of

development, if the shopper experience is to be supported and enhanced.

The changes in the way people shop for groceries does not always relate into demand for

new retail space. Click and collect or on line shopping, for example, does not necessarily

require additional retail space. Assessing the need – and planning for future retail

floorspace will remain an important part of effective plan and policy making.

The continued pressure for out of centre retail development means that if town centres are

to remain attractive to developers, retailers and shoppers alike, strategies may be needed to

support town centre locations in order that they may be able to compete effectively with

out of centre locations. This could include a range of initiatives, such as:

- Masterplanning and visioning exercises

- Site assembly

- Enhanced accessibility

- Public realm and streetscape improvements

- Retail / leisure town centre marketing / events initiatives

- Other preferential policy approaches

Crucially, there is no one size fits all policy for retail – and especially in the context of town centres,

the preferred location for retailing. Retail development strategies and policies should be shaped to

meet the needs of individual centres and their shopping catchment, as well as their economic

circumstances.

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