In a constrained economic environment the food retailers are resilient. We have been pleasantly surprised by the sales momentum of the supermarkets over the past year, not just in terms of the understandable impact of inflation but volumes too.

Within this macro-economic context we have also observed the investment plans of the food retailers with interest, but something at a headline level makes us less relaxed. In particular, it is notable that with the exception of M&S all of the majors have sustained and, in some cases announced an increase in space investment.

Morrisons, Sainsbury’s and Waitrose talk about ambitions for faster space growth, while Aldi, Lidl and Netto keep their store expansion feet on the accelerator. A growing feature of the market is the rapid roll-out of single-price players such as Poundland and its cousin Home Bargains, while Tesco continues to open circa 5% to 6% space per annum and Asda also harbours ambitions to open more stores.

From a financial returns perspective, is this healthy? Can all of these players proceed and emerge butter side up? Our answer here is yes we believe the toast can fall on the carpet without making a mess and for the following reasons.

Firstly, the British population is growing rapidly, it was 61.5 million at the last count. Secondly, the planning regime makes the opening of new superstores particularly challenging and we do not anticipate a return to the store growth rates of the 1970 or 1980s, when Sainsbury’s and Tesco, in particular, opened outlets with gay abandon. Thirdly, while the headline figures suggest rapid space growth, the underlying position from a food perspective is much healthier. A major proportion of the space Asda, Sainsbury’s and Tesco seek to open is to sell non-food; 40% to 50% of Tesco’s UK space is allocated to these categories.

Additionally, Sainsbury’s and Tesco also target the convenience sector, which is a constraint on the independent trade but at the one-stop-shop end of the market is more manageable. Further, a proportion of ‘new’ space is recycled existing space trading under a new banner.

So, despite the challenging economic context, the maturity of the industry and the historic portents, we believe the expanding food retailers are being rational and do not foresee disequilibrium materially eroding returns. Yet.


Clive Black is head of research at Shore Capital Stockbrokers.

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