The rise of online, the discounters and multichannel have all rewritten the rules in supermarket property
It was in 2014 that the supermarket space race was officially declared over, as a chilling report by Goldman Sachs suggested up to one in five supermarkets would close owing to a chronic oversupply of bricks and mortar in the portfolios of the major multiples.
Yet the merchants of doom underestimated the power and resilience of grocery retailers. In the years since, it’s certainly true to say that the discounters have had the market largely to themselves.
A report this month by Barbour ABI showed Aldi and Lidl each submitted more than three times as many planning applications in the past year as the big four supermarkets put together. That follows Aldi’s revelation to The Grocer in May 2017 that it would open up to eight stores in large towns, with concrete plans to have at least 1,000 branches up and running by 2022.
Property in numbers
£1.2bn: Supermarket property traded in 2016 (Colliers International)
£482m: Institutional investment in supermarket property in 2017 (Colliers International)
{128} Planning applications for new stores by Aldi and Lidl in 2017 (Barbour ABI)
{20} Total planning applications in 2017 by the big four grocers (Barbour ABI)
{423} Discount stores attached to out of town schemes in 2017 (Savills)
But the big selloff hasn’t really happened. While porfolios have been tweaked, and property teams heavily pruned, the big four have been reinventing and repurposing big stores, while restructuring the finances around them - with Tesco even buying back stores from British Land to take firmer control - and though this activity has met with varying degrees of success, optimism is unquestionably growing about their sustainability.
Indeed such has been the turnaround that property experts indicate grocery retail is once again becoming the place for investors to put their millions.
Last week a report by property giant Colliers revealed UK institutions had doubled their year-on-year investment into supermarket property from £216m in 2016 to £482m last year - a massive 123% increase, which it said reflected growing confidence in the sector.
There has been far less positive news on the high street though, as crippling rents and the suffocating burden of business rates, combined with the steady shift to online shopping have put the survival of many retail businesses in jeopardy.
Just this month high street stalwart House of Fraser issued what some viewed as a landmark appeal for lower rents, warning it would need to reduce its high street square footage by nearly a third. Debenhams issued a profits warning for similar reasons just weeks ago, and then there is the all too familiar site of deserted BHS sites in many town centres providing a ghostly reminder of how the power game has changed.
This grim news for bricks & mortar was summed up in a report by lending platform Lendy just this week, which showed applications for new shops and shopping centres had fallen for the ninth year in a row.
Applications in England were down 55% since the credit crunch to just 6,090 in 2017, they found, compared with 13,500 in 2008, as retail spend continues to migrate to the internet, leaving retail vacancy rates rising to more than 12%.
While positive news on food sales over the festive season has given rise to hope, online shopping growth and the challenge of competing with the discounters - to say nothing of economic uncertainty - has resulted in disappointing GM sales notably for Tesco, Sainsbury’s and M&S and forced the grocers to look once again at the cost of their business models. Plans for thousands of further staff redundancies at the likes of Asda, Sainsbury’s and Tesco have already been announced this year. And in the shadows, perhaps the biggest threat to traditional models of all is yet to fully bare its teeth. With Amazon buying up warehouse space at a rate of knots even Tesco would have found hard to match during its pomp, all eyes are on what it and a new breed of online food retailer does next.
Adapting to the online era
This seismic shift to online means the ‘build it and they will come’ approach has been replaced by retailers racing to ensure their operations adapt to an era in which consumers won’t even wait until tomorrow for their delivery; they want it today, sometimes even in the next hour.
James Watson, head of UK retail Capital Markets at Colliers International, and author of its latest report, says the supermarket sector faces major challenges in regards to meeting these demands for faster online fulfilment.
“Getting shopping that has been ordered online delivered to customers remains a major headache for operators,” he says. “Whilst supporting brand loyalty, it is a loss leader for the supermarkets. However, some are now combining the desire to have less sales floorspace with the need for online fulfilment capacity by converting areas of existing stores into pure logistics space.”
Yet there are other areas where the big guns are sensing a chance to grow their property empires in new directions. Bolstered by its soon to be completed £3.7bn takeover of Booker, the UK’s largest supermarket Tesco is moving into uncharted waters, with the distinct possibility that Tesco will welcome wholesale customers in selected stores through Booker product and services. And experts predict we will soon see a raft of further consolidation in the convenience and foodservice sector.
Watson argues the acquisition will be far from the last of such mergers “between supermarket brands and new partners extending well beyond just the existing core relationship of putting food on shelves”.
David Haywood, founder of Maximise, adds: “Over 10,000 symbol group locations are currently in the process of merger or supply agreements with Tesco, Morrisons and the Co-op alone. I don’t see that the likes of Tesco are moving into this area to stand still.
“The latest figures from Kantar Worldpanel state that symbol groups account for 1.7% market share of the grocery sector.
“But we feel that this figure understates the potential of this market. That is clearly going to have a big impact on properties in this sector.”
Stephen Springham, head of retail research at Knight Frank, says beneath the huge structural challenges facing the grocery sector and the wider retail property market there are many reasons for retailers be cheerful.
“The market is actually quite a positive story for grocery retail. Things are a lot healthier for the food operators than for some of the other sectors and that factor is the lifeblood of the grocery property market, though it doesn’t mean that the grocery retail market and who holds the power in it is cyclical.
“The changes that are happening are structural and we are not just going to go back to the way it always used to be.”
A new breed
It is this realisation that has led to what Ed Cooke, CEO at Revo, calls “a different breed of person and a different type” of power player in retail property.
“Property companies across the country are looking for people from different backgrounds. It’s not all about old school surveyors any more, they are looking at the computer sector, scientists, engineers, people who understand things like artificial intelligence.
“There is a big change coming and it’s the people as well as the physical fabric. Everyone is starting to think differently.
“Despite all the moves to online, 80% of all transactions still take place in physical retail space - it is what you do with it that is changing.”
All of which makes for a fascinating power battle between retail business models old and new and it is amid that tumultuous backdrop that The Grocer has looked for the first time at some of those holding the strings.
Having often played second fiddle to Aldi in recent years, 2018 looks set to be the year Lidl leads from the front as the £1.45bn investment in expansion it announced last year begins to pay dividends. Now consistently growing at a faster rate than its rival, research by Barbour ABI shows Lidl had also overtaken its rival in the battle for new space by the end of 2017, with 68 planning applications for new stores to Aldi’s 60.
Lidl, which opened its first UK store in 1994, now has more than 600 branches and last year said it would open between 50 to 60 stores every year until 2019, compared to the 30 it opened in 2016, in its fastest ever expansion programme in the UK.
Overseeing that rapid growth will be chief executive of property procurement and development, Ingo Fischer.
Fischer moved to Lidl’s UK business in 2003 as construction director, having previously worked in its German operations, becoming national property director in 2004, before joining the board of directors in 2008.
Under his leadership, Lidl’s strategy has evolved beyond recognition, say experts. “They are not just extremely acquisitive but they are being more imaginative in some of the plans we’re seeing,” says Steve Burnaby, director at Colliers International. “Lidl is leading the way in finding alternative sites as greenfield sites become more scarce.”
And it’s not just in the scale of its stores but in a more canny approach to planning that Lidl, led by Fischer, is making its mark.
Richard Petyt, who heads Knight Franks’ retail team, says: “Traditionally it would try to work discreetly with just the landowner but that all changed 18 months ago. They are putting themselves out there with the strong message that they are open to do business.”
Everything from former multistorey car parks to disused BHS stores are now in Lidl’s property mix. And last month it announced plans to open its 16th and - at one million sq ft - its biggest ever distribution centre in Luton, as it ramps up logistics capabilities with a raft of new DCs. According to Savills it took up 754,000 sq ft of new warehouse space in 2017, a feat outdone only by Amazon.
Aldi has led the new supermarket space race for half a decade now, rapidly expanding its property empire in the process. Last year CEO Matthew Barnes even suggested to The Grocer it could take its estate to an eyewatering 1,300 stores by 2022, putting (wishful) suggestions that the wheels would soon come off its expansion firmly to bed.
Aldridge, who joined Aldi as an area manager in 2007, having previously worked as a software manager, became corporate property director at the discounter in 2016, heading up Aldi’s acquisitions programme, and co-ordinating Project Fresh - its rollout of new-look refits and refurbs.
He sits on Aldi’s property committee and has a key role working with Aldi’s network of regional property directors. Sources say Aldi is known within the industry as providing greater autonomy for its teams on the ground compared to rivals such as Lidl, which has a larger centralised property team. But this strategy, overseen by Aldridge, has clearly not stopped it from being ultra-aggressive on the expansion front.
While the likes of British Land have sought to cut their ties with supermarkets, investment company Supermarket Income REIT has gone the other way. After an IPO last year, more than £200m of store assets have already been snapped up as it has carved out a strong position in the grocery property market.
The investment vehicle acquired its first superstore, a Tesco in Norfolk, for £43m in August last year. It now owns three Tesco sites and one Sainsbury’s store and is on the lookout for more, targeting stores owned by investment companies and pension funds.
Ben Green, founder of Atrato Capital, who along with partners Steve Windsor and Steven Noble acts as adviser to Supermarket Income, has staked his fortune on the belief that the death of the hypermarket has been greatly exaggerated.
Atrato views big supermarkets, despite the issue of excess GM space, as being a good long-term bet and much more resilient than other retailers to the migration to online, not least because of their in-built ability to offer services such as click & collect and to act as online hubs. The future, it argues, is not online but omnichannel.
With Tesco heavily preoccupied with the Booker takeover, and Sainsbury’s with its acquistion of Argos, Supermarket Income REIT are now in a powerful position to snap up stores, which could well turn into hugely valuable targets for retailers in years to come.
It’s a position rich with irony. It was only in 2014 that Goldman Sachs was predicting that one fifth of supermarkets would need to close. Green has seen the market come full circle, having spearheaded the sale and leaseback of Tesco stores in his previous role at Goldman Sachs. He is the classic poacher turned gamekeeper in the market, says one source: “Nobody else has done more supermarket finance than Ben.”
The days of Tesco blasting away its rivals at the peak of the space race may be history but the sheer scale and size of its property empire mean chief property officer Rigby remains a major power player. Tasked with heading up one of Dave Lewis’s six strategic priorities - maximising value from its property - by last year Rigby had already overseen deals worth a staggering £1.2bn. Neither has Rigby’s role been all about retreat, with Tesco spending hundreds of millions in the past few years to buy back stores, while also looking at how best to repurpose space, through concessions with the likes of Arcadia and Holland & Barrett - and coming soon, introducing Booker products and services for wholesale customers in selected stores.
In 2015 Tesco announced a £733m property swap with British Land, giving it sole ownership of 21 superstores, while British Land took over Tesco’s stakes in three shopping centres and three retail parks. Tesco has also spent over £500m buying back stores that it has previously sold and leased back to property companies, giving the retailer more power over the destiny of its assets (and rents).
Last year it repurposed more than 400,000 sq ft too and Rigby is also pursuing so-called ‘air rights’ deals above selected stores in urban areas (see feature on p34) on long-term leases to residential developers for the space above its freehold sites. Meanwhile it has been signing a raft of major deals to utilise excess space in its car parks.
Rigby was among the key executives given an incentives deal in 2015, as the retailer sought to keep its most powerful execs following the financial scandal of 2014. Before joining Tesco as asset and estate director in 1995, he was a partner at property giant Healey & Baker (now Cushman & Wakefield) as a partner. His roles at Tesco include UK property director, chief property director of Tesco China and chief property officer.
As Sainsbury’s exited the space race, it drastically scaled back its property team, and Rodgers, the then CFO, took on responsibility for the division. Having helped Sainsbury’s boss Mike Coupe pull off the audacious £1.4bn capture of Argos from Home Retail Group in 2016, Rogers’s influence on the property side is now even greater, though, in making sure the integration/selloff of Argos stores pays off.
Still tipped as a future Sainsbury’s boss, Rogers cause would have been done no harm by what Coupe described as “stellar growth” in Argos’ Fast Track delivery and collection service in the last quarter, which helped online account for no less than 20% of Sainsbury’s overall group sales.
Taking a leaf out of Amazon’s book, but with the addition of Sainsbury’s 200-strong store network plus its own remaining standalone stores, Argos last year began offering delivery within four hours for a fee of £3.95, and free Fast Track click & collect at stores for 35,000 products.
The integration of the two businesses has proceeded at speed, with plans for 250 Argos digital stores in supermarkets by March next year and more than 100 click & collect points brought into Sainsbury’s convenience stores last year, while Argos stores have closed down on UK high streets at similar speed.
Amazon expanded its UK distribution space by a whopping 4 million sq ft in 2017 - well over three times the extra space set to be rolled out in UK shopping centres in 2018. And a report by Savills shows the online giant not only acquired more warehouse space than any other company; it accounted for more than a fifth of all space acquired in 2017.
Kevin Mofid, director of research at Savills, describes the expansion as “unprecedented”. “You had a point about 10 years ago when the grocers - Tesco, Sainsbury’s and so on - were very active, and they took a lot of space, but it was nowhere near this level.”
New to his UK role, having taken up the position in September, UK head of real estate Watkins, comes with a formidable CV. He became head of real estate for Amazon in Germany in 2016, having previously worked for discounter Lidl in the UK and Europe, latterly as property director in its Denmark operations, where he led a store rollout programme worth €50m a year.
As retailers compete for vital ‘last mile’ distribution space, Segro’s vast property empire of warehouses around London and other key cities has put CEO Sleath in a powerful position to profit. Segro owns, manages and develops industrial space critical to the grocery supply chain in a climate where lack of industrial land around London and lack of available urban logistics space are driving up the value of key space.
Leading sources say some of Segro’s facilities are able to command rents almost as high as that of residential or office use, such is the pull of locations where it operates and the high spec of its warehouses in locations like Park Royal in West London.
Banking on the shift to online and same-day delivery, it last year raised a £556m war chest for further expansion, focused around the capital. Sleath, who became CEO in 2011, having previously served as FD since 2006, has also spearheaded a raft of major property redevelopment deals, including plans to redevelop the former Nestlé site in Hayes for more than 1,000 homes.
Despite its continuing and rapid expansion, there’s no property director on the board at B&M. The man who’s pulling the property strings is Simon Arora, the eldest of three brothers, and a man with a canny eye for a property deal. He’s not unlike Tom Morris at Home Bargains, in that sense, but B&M’s growth is not only faster - supported by 19 store openings in the last quarter of 2017 alone, taking its total to nearly 600 - but with the acquisition of frozen food retailer Heron Foods, B&M is making an increasing play in the frozen food space - with massed ranks of freezers now in many of its stores.
Arora is not just canny on the property side, of course. The Aroras, whose father ran a cash & carry in Manchester, bought B&M in 2005 from founder Malcolm Billington when it was making a loss but last year alone they made more than £1bn from share sales.
Whilst the big four have tightened their belts, the Co-op has been splashing cash on new stores as it fights back from its financial crisis. Director of portfolio and property Hookins is heading a £160m store investment and expansion programme this year, which will see the Co-op open 100 new stores for the third year in a row. So far more than 700 stores have been opened or refitted in that period.
There have been disposals too, with the 2016 sale of nearly 300 stores to McColl’s, but the Co-op’s business model, say experts, has given it an edge over rivals because it can buy stores based on typically longer payback periods.
Hookins has spent 10 years at the retailer, joining from Siemens, and gradually worked his way up to the top property job, overseeing all new store developments and acquisitions.
With 20 years’ capital markets experience, Watson has carved out a reputation as a leading operator in the food and drink property sector. Author of the influential annual Colliers Supermarket Investment Report, one of the bellwethers of the property market, he has also been instrumental in more than £600m of food store sale & leaseback deals.
Last year he completed the sale of the 101,000 sq ft Tesco Extra in Kettering to Legal & General, on behalf of Aviva Investors, for £52m. And he is likely to have much more business on his hands soon, with the latest Colliers report showing institutional investment into supermarket property rose from £216m in 2016 to £482m last year - a 123% increase. As Watson says, after getting the wobbles during the space race crash institutional investors are now “emphatically back in the market”.
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