The infinite variety of high street retail?

They say variety is the spice of life – but the nation’s ranks of independent grocery retailers may beg to differ. With often favourable terms from suppliers, independent variety discounters are starting to dominate UK high streets – and The Grocer’s ranking of the nation’s Top 50 independent grocery retailers.

Of the eight discounters that made this year’s ranking, five are in the top 10. Their sales grew by 11% to punch through the £4bn mark for the first time. With profits of £154m, they made 80% of the Top 50’s profis. And, adding a further 234 stores, they increased their property portfolios by 13% to 2,074 stores – accounting for 80% of the 292 stores opened by independents in the past year.

But how sustainable is the growth of these discounters? How likely are they to remain independent? And, with other independent grocery retailers struggling to keep up (strip out the discounters and sales would have been up just 7%, with profis down 40%), what can they do to fight back?

Few retail sectors have witnessed as much activity as indie discounters over the past year. Following Malcolm Walker’s £1.45bn takeover of Iceland, the frozen discounter, from its Icelandic investors, Heron Foods bought Iceland’s lesser-known chain Cooltrader to add 54 stores to its portfolio; Poundstretcher expanded its estate by a further 20 stores a er buying failed supermarket chain Ugo Stores out of administration; and private equity firm Clayton Dubilier & Rice bought a majority stake in B&M Retail for an estimated £965m in December.

CD&R’s involvement in B&M is arugably the most significant because it confirms the interest of private equity players in expanding this market. As early as 2002, Poundland fell into private equity ownership when it was bought by Advent International and it was eventually sold on to Warburg Pincus in 2010. But while Poundland powered ahead, rumours linking rival private equity groups to other discounters failed to come to fruition - until CD&R took its stake in B&M.

The private equity group, which counts former Tesco CEO Sir Terry Leahy as chairman, has big plans for the discounter, both domestically and overseas. And despite TJ Morris vowing to remain independent last week (The Grocer, 16 March), private equity interest is unlikely to end here. There’s continued speculation the Lalani family, which owns 99p Stores, could sell a stake to a private equity group, while last month reports emerged that the Edwards family - which own Poundworld - was mulling a private equity investor.

“Private equity will always be interested in our sector because the growth story is there,” says Hussein Lalani, commercial director for 99p Stores. “The biggest of us have all got over 200 stores and we have all grown quickly. And we’ve all still got room to grow.”

“We’re going to see massive consolidation among the discounters”

Senior retail source

Consolidation

It’s not just growth that appeals to private equity: with so many of the great independent grocery retail chains selling up over the past decade - just 10 remain from the first Top 50 ranking compiled by The Grocer in 2002 - the fact that so many remain family-owned makes them the ideal target.

“We’re going to see massive consolidation in the discounters,” says one senior retail source. “So many are family owned that they need the organisation and outside view private equity can bring.”

“There will be consolidation and acquisitions in the near future to give the VCs exit opportunities,” agrees a senior wholesale figure. “They have attractive growth profiles.”

That’s largely because, unlike the multiples, the discounters don’t seem to have any difficulty picking up vacant units on the high street. Data from PwC and The Local Data Company last month revealed that ‘pound shops’ were bucking the trend for store closures on the high street, opening 13% more units in 2012, beaten only by cheque-cashing stores (up 20%) and pawnbrokers (up 13.2%).

And whereas before the recession, there was a stigma attached to discounters, with shopping centre owners keen to stay clear of them, now, in some instances, they are even seen as anchor tenants.

“I don’t know why people are so negative [about variety discounters],” says Lalani. “We are the ones taking up the empty units. There have been so many failures over the past year. The high street needs companies to come in and fill the empty shops. We’re keeping the high street alive.”

Joe Morris, operations director at TJ Morris, agrees: “I don’t know how anyone can be criticised for growing too fast. The majority of growth on the high street is coming from the supermarkets’ convenience stores. The discounters are just a fraction of what the supermarkets do. Yes, the discounters are filling holes on the high street, but what would people prefer - a hole or a shop?”

With their size and growth profile suppliers are treating them differently, too. Within the past few years, manufacturers have started supplying them directly, have appointed specific buyers, and adjusted product sizes and packaging for them.

“As a route to market for suppliers, with £3bn sales between the main five discounters, they are now hitting the radars of most,” says the senior wholesale source. “I’ve seen different/specific packs being supplied for the last couple of years, driven as much by the supermarkets getting into the ribs of suppliers to stop them supplying the same items, which are being sold at much less money, as well as the suppliers recognising the discounters as a very viable set of ‘new’ customers in their own right.”

This creates a headache for other independents, however, who as well as battling against the might of the multiples, are having to change their strategies to battle against variety discounters, too.

Differential

CTN specialist Rippleglen introduced a Supernews Discount fascia in January specifically to compete against variety discounters on the high street. The fascia has now been rolled out to all its high-street shops. “Many suppliers seem intent on pushing their products through pound shops and seem to see only this channel for volume,” says Rippleglen MD Mike Colley. “Maltesers is now a pound line and is unsaleable at rsp. The rest of us appear to exist only to cover off their fixed costs.”

Bestway MD Younus Sheikh also bemoans the price-marked packs offered by suppliers through the convenience channel. “The price differential must be lower. It cannot be right to have a can of Coke with a pmp of 59p, while discounters are selling cans for 33p. It forces independent retailers to shop there.” Simon Arora, co-founder of B&M Retail, believes discounters, however. “The market is big enough for all the different retail formats to comfortably co-exist,” he says.

And the variety discounters aren’t having it all their own way. With B&M out of the picture, profits for the remaining discounters in the Top 50 fell 2%, and margins were down from 4.2% to 3.7%, as Wilkinson endured a 62% slump in profits (and a “small decline” in like-for-like sales), while Poundworld’s profits dropped 28%. Both blamed investment in new stores.

Recent data from Kantar Worldpanel shows sales are also on the slide at frozen discounter Farmfoods. Since September, its sales growth has been in negative territory - starting out at -1.7% for the 12 weeks to 30 September and falling as low as -10.3% for the 12 weeks to 20 January. The most recent data shows sales down 8.2%. And in November, Farmfoods saw its precious share of the grocery market fall - from 0.6% to 0.5%.

“Farmfoods is under pressure in the lion’s den,” explains Kantar Worldpanel director Ed Garner. “It’s up against Aldi, which has growth of 30% and Lidl at between 10%-12%. Iceland is doing nicely, too. It is losing out to Asda and Tesco, but relative to its size, it is Iceland, Aldi and Lidl that are its main worry.”

Variety discounters have also got their work cut out bringing their stores and customer service levels up to scratch. Although there are countless surveys to show that an increasing number of shoppers intend to use discounters more this year to save money, according to Him!, they’re falling short in terms of store standards.

In its latest Variety Discounters 2013 programme, Him! found that, although shoppers scored discounters eight out of 10 or more for ‘ease of finding products’, ‘quality of products’, ‘availability of products’, ‘range of products’, ‘range of promotions’, ‘staff friendliness’, ‘value for money’ and ‘clear pricing’, they fell short on ‘appearance of store’ and ‘speed of service’. So even though 43% of shoppers said they would recommend a variety discounter to a friend, that’s lower than the 50% who would recommend a c-store to a friend.

Despite such negative factors, however, discounters remain confident. “Being a discount retailer doesn’t give you a licence to print money,” concludes TJ Morris’ Morris. “There will be growth, but it’s going to be hard fought.

“Where there was only one or two competitors, there’s now three, four, five or even six, so when you’re competing against that many, the elbow room reduces. Anyone can sell something cheap, but you’ve got to be able to make money too.”