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How many supermarkets will we really need? The future of the UK grocery market.

With a significant over-supply of retail space, against a backdrop of negligible market growth, the UK grocery market is in crisis. The growth of ecommerce, convenience formats and discounters, alongside an over expansion of large grocery stores, means the Big 4 supermarkets are over-exposed.

By 2020 there is strong chance that only three of the Big 4 will remain. So what do the Big 4 need to do now, to maximise their chances of survival?

With negligible growth in grocery sales (<1% pa in real terms) since 2007, an increase in store space of 38% across all formats over the same period, and market share shifting strongly in favour of smaller formats (convenience/hard discount) and ecommerce, sales densities (sales per square foot) of large formats have declined dramatically, by 16% in real terms.

Too many big grocery stores, too few sales.

With their significant exposure in large stores, the Big 4 supermarkets (Tesco, Sainsbury’s, Asda and Morrisons) are acutely affected by these falling densities. Their larger stores will experience further significant declines in productivity over the coming 4-5 years. Indeed, the deterioration in average hypermarket and superstore profitability will continue at least until the volume of large format supermarket space returns to 2007 levels.

The Big 4 supermarkets must act now.

All of the Big 4 grocery retailers are acting – some with more impact than others – to maximise their chances of survival. They are making large format space reductions, re-engineering their cost base and reshaping their price architectures. They are growing their ecommerce, as well as their convenience and (in some cases) new discount formats, but there remains plenty to do.

Despite any other actions taken, there needs to be a reduction in space for the Big 4 to generate good net margins. This means a 20-30% reduction in hypermarkets and superstores; a return to space levels seen in 2007. But even then, real productivity will not return to levels in that year, as the addressable market for large stores has shrunk.

However it’s unlikely any one of the main supermarkets will close stores yielding even a small contribution, so the Big 4 are locked in battle, each maintaining excess capacity despite diminishing returns, and times will continue to be challenging for each one of them.

The Big 4 supermarkets in 2020.

By 2020, it is likely that the Big 4 will have become the “Big 3”. After a long period of instability, the grocery market will have returned to a measure of equilibrium with 25% less hypermarket and superstore space (achieved through a combination of store closures and creative sub-letting). The ranges and price architecture of the Big 3 will be competitive with discounters, while also serving premium customers, and significant costs will have been taken out of head offices and supply chains.