A One Stop shop for big margins?

Remember the Sainsbury’s employee caught nipping to Iceland to pick up 20 loaves of bread to restock his shelves?

The mark-up didn’t go down well with the Sainsbury’s customers, who watched open-mouthed as the employee wandered back into the store weighed down by Iceland carrier bags, or with Sainsbury’s HQ. In fact, the only place it raised a smile was at Iceland, where CEO Malcolm Walker quickly offered the “astute” employee “with a nose for the best deals” a job.

But while it might be a tad unusual for one of the big four to be caught resorting to such tactics - and in Sainsbury’s case, adding a hefty 49p to the Iceland round pound before putting the bread on shelf - it’s par for the course for many indies. One major wholesaler boss even confesses to actively advising members to shop at their local supermarket if a good deal is on.

The reality is that rampant price cuts and great bulk buy offers mean it often makes economic sense for indies to buy from the mults rather than traditional wholesalers. In this month’s business barometer, 27% of indies admitted buying products from a supermarket, with 81% citing cheaper prices as main reason.

And now there may be a new opportunity to take advantage of the mults’ purchasing power without embarking on a clandestine trip to the local hypermarket. Last month, Tesco unveiled plans to launch a franchise model of its One Stop convenience store chain. The retailer already has one pilot store up and running and plans to extend the trial to six to 10 stores “in order to test and refine the package, so it’s a compelling offer for retailers”.

” Tesco isn’t going to lose money putting deals into an independent and doesn’t do the deals in Express or One Stop it usually does in its biggest stores”

Kash Khera, SimplyFresh

The question is: just how compelling? Should indie and symbol retailers be quaking in their boots at the prospect of a Tesco-backed rival offering Extra-style deals? Or will One Stop, which Tesco says it will continue to run as a separate business, just be the latest conventionally-priced convenience franchise on the high street - one that will pose a threat to other symbol groups, perhaps, but not to the extent of undercutting their prices to Tesco Express levels, let alone Tesco Extra?

While Tesco remains tight-lipped about how the franchise model will work, the findings of this month’s business barometer suggests the fascia is already attracting a lot of interest from potential franchisees. Some 20% of 250 independent retailers quizzed by CheethamBell JWT said that if approached by Tesco to become a One Stop franchise they would consider it. A further 16% said that they ‘might be’ interested. While this leaves the vast majority (the 57% who said a resounding ‘no’) firmly against such the switch, the survey suggests there’s plenty of people to target with its first tranche of conversions.

Tesco is steadfastly refusing to confirm the location of its one-and-only pilot store, although it’s reported to be somewhere in Wiltshire. However, details are slowly starting to emerge of what the model could entail. The Grocer’s sister title Convenience Store reported last month that the scheme is likely to be based around retailers purchasing stock from One Stop at a wholesale price and retaining the margin when sold at the designated retail price.

Lower price points?

One Stop itself is keen to emphasise that the franchise model is a “One Stop initiative” and “franchisees will gain access to One Stop’s low cost operating and distribution model”.

However, one industry source believes Tesco’s franchise plan could be part of a wider move by the retailer to dramatically increase store numbers and lower One Stop’s price points in one fell swoop. He reveals the property team is under orders to secure 200 new stores before the end of 2013 (it currently has 640). “Otherwise they have been told that heads will roll,” he says. “People will get sacked.”

A key upside of the franchise model is that it enables Tesco to snap up properties without “a massively expensive initial outlay” on property, suggests the source. Crucially, it also means that the cash Tesco saves can be used to reinvest in prices. “If they are getting a site doing £20,000 a week, they would have had to pay around £250,000 for that site to buy it outright,” he explains. “Saving that money means they may be able to pump it back into prices.”

“The One Stop offer is about a real retail partner serious about developing an individual’s business by working closely with us”

One Stop spokesman

But not everyone is convinced that consumers will feel the benefits of independent retailers switching to the One Stop fascia. Kash Khera, director of franchise retail group SimplyFresh, says it’s unlikely a One Stop franchise will suddenly start offering Tesco Extra-style deals. “One Stop isn’t cheap by any stretch of the imagination,” he says.

“It all depends on the deal, but those sort of deals are usually loss leaders. Tesco isn’t going to lose money putting those deals into an independent channel and it certainly doesn’t do the same deals in Tesco Express or One Stop it usually does in its biggest stores, so I think not.”

Khera also has mixed feelings about the benefits for potential franchisees. “If everything is automated, all the ordering, back office stuff, if that is all be done by state-of-the-art EPoS, then some independents will like that, particularly those who want to focus on growing their portfolio,” he says. “It will free them up to do more of that and mean all they have to do is manage their staff. But independents can really shine by the personality and individuality of their stores. If you take that out of the equation, it’s a shame.”

For many in the convenience sector, being aligned with the Tesco brand will be a very “attractive proposition”, says Khera. However, he doesn’t think it will be easy to get the nod. “Tesco will want to examine your books, do background checks,” he points out. “They won’t want any bad publicity associated with Tesco.”

One Stop insists “a lot” of retailers are keen to hear more and that it is “confident that what we have to offer will appeal to good independent retailers”.

Whether or not they manage to convert retailers to the One Stop fascia will in many cases boil down to price. At the moment, indie retailers are not averse to doing a of top-up shop at the nearby supermarket if they can secure a cheaper deal, as the findings of our latest business barometer shows. Industry insiders also talk of shady deals done “by the back door” between indies and supermarket managers, where pallet-loads of booze are quickly loaded straight into white vans.

The reality is that the One Stop franchise model is unlikely to offer the same prices as the multiples’ big box outlets, the discounters - or Iceland - and these are who the wholesalers are losing out to, not the Tesco Expresses or Sainsbury’s Locals of this world.

One direction for indies?

That said, if it could offer independent retailers something more competitive than they’ve currently got, it could be a game changer, believes The British Franchise Association’s director general Brian Smart.

“There will be many issues for independents: the extent of purchasing restrictions, in-term and post-term non-compete obligations, commitments on pricing strategies between different strands in the distribution channel, the utility of management information and EPoS systems for independent owners.

“But with the right contractual framework and the right approach to network management, it will be a substantial win for all the stakeholders: for the independents who convert to the power of the Tesco brand for consumers with a locally-owned service leveraging the purchasing and quality control of Tesco and for Tesco with an extended distribution network delivered by local owners with skin in the game.”

Time will tell whether indies will be beating a path in one direction to One Stop’s door - or whether they value their independence too much.