Supermarkets like their customers to have long shopping lists, but these days they have lists of their own. In a society where fewer people want to do a weekly mega-shop, preferring to stop off for that night's meal on their way home from work, the corner shop is the new battleground for share of spend, and big retailers are looking out for successful convenience chains to buy.
Impressive figures from food and grocery industry body the Institute of Grocery Distribution (IGD) make it clear why the multiples are so keen on the convenience sector, which has grown 7.3% to £23bn in the past year and is set to top £30bn by the end of 2008. Tesco, Sainsbury's, Somerfield and the Co-operative Group are snapping up scores of small chains and shops, and the convenience-store sector has seen a burst of acquisitions, the most recent of which was Jacksons Stores, sold to Sainsbury's last month.
The Open All Hours-style shop with its dusty shelves is giving way to shiny fascias and a slick, corporate image backed by retail expertise.
And it's no bad thing, according to Laura Haynes, managing director of brand consultancy Appetite, which works with Spar. 'The consumer will benefit most, as the big retailers are bringing a bigger fresh-food offer into the mix, along with longer opening hours,' she says. 'Brand manufacturers will benefit from the major multiples' entrance by being offered a new discipline in terms of distribution, pricing and consistency of availability.'
A Somerfield spokesman agrees that manufacturers benefit by association from being in a multiple's convenience store: 'They're getting credibility from our retail brand, as well as more footfall, which means bigger sales.'
Many Somerfield promotions transfer to its convenience stores. 'There's a big investment from us to push brands,' adds the spokesman. 'The focus we're putting on the convenience business will benefit the sector.'
Yet not everyone's happy, and the recent consolidation has prompted the Association of Convenience Stores, which has been campaigning against the consolidation of the convenience store sector on behalf of its members (mainly independent retailers and small chains), to make submissions to the OFT urging it to refer the recent takeovers to the Competition Commission. The basis for any investigation would be dependent on a redefinition of the grocery market. The current definition, which treats the convenience and one-stop shop sectors as separate, was outlined by the Competition Commission in 2000, and allows companies such as Tesco to buy convenience chains, as the purchases do not it affect its standard market share (which includes one-stop shopping, but not convenience).
However, it seems not even the OFT is willing to stop the advance, so while Tesco may so far only have about 5% of the convenience sector under its control, its buying power is at least £20bn. Buying centrally means multiples can offset costs and maintain margins while still competing strongly on price. And while manufacturers might get more sales in a multiple convenience store and benefit from a better-managed supply chain, they may also lose some control and risk lower margins.
Although brand manufacturers are having to deal with the fact that power is being concentrated in fewer hands, this can make it easier for them to build a close relationship with retailers. Some marketers point to the fact that they usually deal with the same buyer across all store formats, which can be useful if that buyer's knowledge is holistic, meaning they will make consistent decisions. Often by working closely with that multiple's buyer, brands can get a better feel for what works in a convenience store format - for example, smaller pack sizes or particular varieties. This consistent relationship can also help marketers to acknowledge that although they will get fewer facings, they could be up against less on-shelf competition because of the smaller store size.
Brand owners should also be aware that in most multiples, there's a different price tier in the smaller stores from the supermarkets, reflecting a more costly operational structure. 'We have to transfer some of the additional costs of a small store,' says a spokesman for Somerfield. 'Our suppliers know we don't have a single price tier - we often respond to local competition by reducing prices, for example.'
James Walton, senior business analyst at the IGD, says it's not a question of supermarket chains raking in the profits. 'I don't think the money from the extra premium on product sold in convenience stores is going into anyone's back pocket. Most of it would have to pay for genuine differences in costs such as rates, wages and health and safety in stores with longer opening hours,' he says.
Although price has become a more critical issue as the big retailers aggressively move into convenience in an environment of price deflation, the issue of price is not simple. Harris International Marketing's (HIM) managing director, Tom Fender, says that often the reason people use convenience stores isn't price, but location and brands. 'This doesn't mean that they can rip people off, but they can push margins up and put more money into stores and staff.'
According to the IGD, retailers and suppliers agree it is appropriate for convenience stores to charge higher prices than bigger-format stores, but retailers argue that 10% is an acceptable premium, while suppliers say 5% - down from last year's figure of 10%. Unlike a traditional convenience store, where prices can be up to 15% higher than supermarkets, the new format stores (such as Tesco Express and Sainsbury's Local) typically only charge up to 5% more than their superstores.
The multiples are now applying their everyday low price (EDLP) strategies across their convenience stores as a result of more favourable buying terms. And this has had a knock-on effect on other convenience chains, such as independent buying group Nisa-Today's. It is promoting more EDLP through its members' stores so that it can be more competitive and as close as possible to the multiples on key lines. A new slogan, 'Price check', is being used on leaflets distributed to retail customers.
But do consumers know or care? Recent research by HIM found that more than a quarter of convenience store shoppers believe prices at supermarkets' local formats are more expensive than their independent convenience store, while a third think they are the same. Of supermarket shoppers, 37% say prices at the multiples' local formats are higher than at the superstore and two-thirds say that this is unacceptable.
Many consumers perceive that the price they are paying in convenience stores is higher than it actually is, which is a challenge for retailers needing to communicate a value message. 'There has been a bit of a honeymoon period in terms of consumers' acceptance that pricing will be higher than in supermarkets. I wouldn't be surprised to see more demand for equivalency,' says Appetite's Haynes. Yet the IGD's Walton says retailers and suppliers are more in agreement now about pricing in convenience stores. 'Both sides say that having a price premium is a necessity, but it must be as small as possible.'
Many brand owners are unsurprisingly not willing to discuss whether this price parity affects their brands' value sales and their relationships with these retailers. All Mike Tipping, Cadbury Trebor Bassett's head of customer relations, will say is: 'We have a standard price list and don't discuss pricing - we just need to make sure we deliver our products to retailers' requirements. We want to grow the category and will serve whoever is in the marketplace.'
Other manufacturers are realistic about the consolidation in the convenience store sector, which is presenting more opportunities. Gary Frank, managing director of Fabulous Bakin' Boys, is positive about growth and says consumers expect that multiples' convenience stores will cost a little bit more than superstores, because logistically they're more expensive to supply.
He reckons the fact that the brand is in both convenience stores and supermarkets doesn't make any difference to negotiations with the chains. Frank deals with the same buyer for both superstore and smaller formats. 'Final retail price is entirely up to them. We don't have any sway - it's their call.'
Sally Stanley, Highland Spring's marketing director, also deals with the same buyer for the different formats. 'We negotiate terms across all their formats, and there's an opportunity to leverage higher prices in convenience stores - and the return makes its way to both suppliers and retailers.' Yet she questions the path pricing is taking: 'You could ask if it's necessary to run EDLP strategies across a whole store base, as profitability could be lost in some store formats.'
The relationship between supplier and retailer in this sector seems to be about compromise and understanding that, even though it's simpler to deal with one buyer at fewer companies and footfall is likely to increase as a result of having a listing in a multiple's local store, brands might not get great margins.
This doesn't stop most brand manufacturers hoping they will get regular listings in the stores. Phil Lynas, managing director of sauce brand Nando's, says: 'Although manufacturers get a better price in the independent sector, there are higher delivery costs. If Tesco is taking responsibility for distribution, your revenue goes down - it's a trade-off.'
The IGD's Walton believes that brand owners need to have a strategy for dealing with the chains' different formats and tailor their offering to suit them. Indeed, Highland Spring's Stanley says that because there is less space allocated to its category in convenience stores than in the superstores, it has to work closely with the stores to understand the individual products and pack sizes most in demand.
So is it all about focusing on how you sell rather than agonising over the price? Neill Sherrell, director at convenience retail consultancy SRCG, believes manufacturers will benefit from these new formats because they have struggled with the convenience sector in the past, when some traditional stores have not delivered on execution. 'Suppliers have to expect a renegotiation over buying terms, but they'll drive greater sales,' he says. 'A supplier would give Tesco better terms than a traditional retailer because Tesco can guarantee better sales,' says Sherrell. 'The benefits will outweigh any loss in profit margin.'
Although there's evidence of an EDLP strategy, it doesn't look as though the same prices will be available in all formats any time soon. After all, why would Tesco want to lose or reduce the 5% price premium in its local stores? According to Sherrell, price only becomes important if the retailer fails to deliver on other issues, such as service and availability - which is key for the big boys.
In common with most brand owners, Stanley is keen to maintain the status quo: 'We wouldn't be doing our job if we didn't seek to leverage a benefit for the brand. You find 4%-5% leveraged in convenience stores, and consumers are prepared to pay that. Nobody's losing out.'
- Coca-Cola 500ml 79p (Sainsbury's)
- Heinz Baked Beanz 38p (Sainsbury's)
- Hovis 72p (Tesco)
- Kellogg's Corn Flakes 500g £1.24 (Tesco)
- Lenor fabric softener 1l 88p (Tesco)
- Pot Noodle 68p (Tesco)
- Stella Artois (4-pack) £3.98 (Sainsbury's)
- Coca-Cola 500ml 85p (Sainsbury's Local)
- Heinz Baked Beanz 38p (Sainsbury's Local)
- Hovis 75p (Tesco Express)
- Kellogg's Corn Flakes 500g £1.29 (Tesco Express)
- Lenor fabric softener 1l 92p (Tesco Express)
- Pot Noodle 71p (Tesco Express)
- Stella Artois (4-pack) £3.98 (Sainsbury's Local)
Consumer opinion of new-style stores
Formats such as Tesco Express are widely perceived as bringing credibility and trust into convenience retail. Shoppers get a familiar retail brand and well-known products, and as a result believe there is more choice. They spend 30% more time in them and 20% more money - £5.38 compared with £4.41 in an old-style store, according to research by convenience retail consultancy SRCG, carried out through exit interviews at convenience stores.
The research also shows that although consumers spend more time overall in the new formats, they don't mind, because it's at a time and location convenient to them and in small bursts, rather than one big shop.
The SRCG study shows that the new-style stores attract younger people, who are usually working full-time with children living at home, while only 30% of over-55s use them, compared with 41% who shop at old-style formats. Unlike the more traditional corner shops, people are far more likely to buy soft drinks at stores such as Tesco Express and Sainsbury's Local (18% compared with 5% at old-style stores). Dairy, bakery and confectionery products are still the most popular, but only 24% of people buy confectionery in new stores compared with 34% in the old formats - perhaps because retailers are not so keen to have confectionery near the checkout due to the obesity debate.
Shoppers in the new format stores are more positive about the experience.
They like the fact they can see prices clearly (80% compared with 55% in the old format) and prefer the layout (82% compared with 72%). Only 30% think prices are more expensive than supermarkets, compared with 53% in the old formats.
Although they make up a small proportion of the total UK convenience market, the new formats have punched above their weight in raising consumer expectations of these stores. According to the IGD, this could lead to market dissatisfaction with convenience stores that do not reach the same standards.
TIMELINE - CONVENIENCE
1994: The first Tesco Express stores open in Barnes and Thornton Heath,
1996: Safeway opens its first 24-hour BP community store in Basildon,
1998: Sainsbury's first Local test stores open in South-East England.
2001: Marks & Spencer launches its Simply Food format in Surbiton.
2002: Tesco strikes a £530m deal to take control of T&S' 862
outlets. The Co-op buys Alldays' 600 stores.
2004: Tesco buys the 45-store Adminstore chain, which includes Cullens,
Europa and Harts, for £53.7m. Sainsbury's buys the Bells chain in
North-East England. Somerfield buys Aberness, which owns or distributes
to 170 convenience stores in Scotland. Sainsbury's buys the Hull-based,
114-store Jacksons chain.
WHO USES CONVENIENCE STORES
owned % stores %
Male 34 31
Female 66 69
18-34 28 25
35-54 41 34
55+ 30 41
ABC1 45 54
C2DE 55 46
Married/cohabiting 68 56
Single 21 24
Divorced/widowed 11 20
Kids at home 40 32
Kids not at home 23 36
No kids 39 32
Working full-time 47 31
Working part-time 18 21
Not working 34 47
- Operates 1820 stores, branded as Welcome or Market Town.
- This includes 76 Balfour, 630 Alldays and 64 Conveco stores bought in the past two years.
- Operates 2250 stores across the UK.
- Operates 1187 stores, branded as Tesco Express and Metro.
- This includes the Cullens, Harts and Europa stores bought in January, and the T&S chain that was acquired in 2002.
- Operates 125 stores, branded as Sainsbury's Local.
- This includes 15 joint-owned with Shell, 54 co-branded with Bells Stores and 114 co-branded with Jacksons.
- Operates 2800 stores across UK.