Convenience in the grocery sector for the Multiples

Metro formats of grocery stores have come to dominate high streets as shoppers rapidly shift their habits, seeking more ‘food-for-now’ options in smaller baskets. Figures from industry body IGD suggest that the convenience market was worth £37.7bn in the year to April 2015 – and sales are predicted to climb to £44.1bn by April 2020. The true costs of operating a convenience store business can be difficult to measure.

Four key costs that grocers have to consider

1. The higher property costs of rent and business rates for high street locations and the creation of separate management teams required to run convenience businesses as the two main areas of expenditure.

2. Cost of deliveries as local laws are in place that prevent Lorries accessing high streets during the day in London and maybe other areas in the future, costs of refurbishment work are also higher because permissions depend on neighbouring stores and residents.

3. Additional costs of running convenience stores, with additional charges are offset by an increase of “between 3% to 8%” on store prices.

4. Convenience operations are as profitable as their bigger stores. Without c-stores, certainly for Tesco and Sainsbury’s, overall profitability would have been lower

Dan Murphy, partner at management consultancy Kurt Salmon stated that,

“There’s a lot of science and research and quite extensive analysis that goes into convenience locations. Just being on the wrong side of the street or 200 yards too far away from a tube station can have quite a significant impact on performance,” he suggests.

“Putting together a property team for convenience is a huge cost because there is a hell of a lot of analysis that goes into getting the right sites.”

In Sainsbury’s 2014/15 annual report, convenience business generated more than £2.1bn in sales, representing growth of 16% on the prior financial year. This shows Sainsbury’s has mastered finding the right locations for its smaller stores, and is earning the rewards.

According to calculations by Retail Week Prospect analyst Philip Wiggenraad, those stores recorded sales densities of £1,380/sq ft during the year, compared to £960/sq ft in its larger supermarkets.

Wiggenraad said: “That difference is what I would expect because it is usually easier to generate higher sales densities in more compact stores. Convenience stores are tightly merchandised compared to supermarkets, packing more goods into a tighter space.

“You have higher footfall, smaller store sizes and higher prices all combining to offset the higher costs associated with running these stores”

“The higher price points also help. While basket sizes may be smaller in convenience stores, if you bought that same basket in a supermarket it would be cheaper.