Sainsbury continues its convenience store push
its move into the convenience store sector with a third acqusition
this week. But is this really the answer to the questions about the
ailing company's long-term business strategy, asks Chris
Jones.
The latest acquisition by Sainsbury is JB Beaumont, a family-owned company which operates six neighbourhood convenience stores the English East Midlands. The price paid for the stores was not disclosed, but Sainsbury said that the value of the assets acquired was £1.2 million. JB Beaumont's turnover was £13 million in the year to May.
The acquisition follows that of Bells Stores in February and Jacksons in August and reflects the aim of new CEO Justin King to create a major c-store operation at Sainsbury, according to M+M Planet Retail analyst Corinne Millar.
"King has targeted this sector as a key area for growth, setting up a dedicated division run by veteran retailer, Jim McCarthy. McCarthy is an expert in the neighbourhood store market, having helped to build and eventually sell the 1,000 strong T&S chain to Tesco in 2002. Under his expertise, Sainsbury is aiming to create a £400 million c- store business trading from some 350 outlets by 2007/08."
According to Millar, three-prong approach is being pursued by King based on developing stand-alone stores trading as Sainsbury's Local, forecourt stores in conjunction with Shell, and dual branded stores with the acquisition of strong regional players such as Beaumont. Sainsbury's has, however, suspended the roll out of the forecourt stores while it addresses profitability issues, she added, reflecting the ongoing tribulations of what was once Britain's premier food retailer.
That crown was stolen by Tesco, which has also led the charge of the multiple retailers into the c-store sector with acquisitions such as T&S and Adminstore. Sainsbury has frequently been criticised for its lack of a cohesive strategy as it tries to return to its glory years, more often than not accused of simply copying Tesco - the disastrous rollout of its non-food range, for example, or indeed its move into the c-store sector.
With King at the helm there is hope that some coherency will be brought to Sainsbury's future strategy - for example, he is credited with scotching the unfathomable decision to bid for TM Retail, whose stores consist primarily of newsagents and are not an obvious fit with Sainsbury - but there are still major questions to be answered.
Why, for example, has Sainsbury opted for a stand-alone approach with its c-store acquisitions? "Unlike Tesco, which has largely rebranded stores under the Tesco Express fascia and brought the stores entirely under its management and ownership, Sainsbury has decided to retain the stores' local heritage and customer loyalty, by jointly branding the stores Sainsbury's at Bell's and Sainsbury's at Jackson's, whilst retaining the original owners," said Millar.
This approach certainly has some advantages. "Sainsbury has brought its expertise in fresh and chilled foods to the stores, whilst the original owners maintain their strength in news, alcohol and impulse purchases, allowing Sainsbury to develop a network of locally adapted stores,", Millar noted.
But, she added, "it may mean that longer term the network lacks cohesiveness, diluting its brand equity and economies of scale".
Sainsbury could struggle to increase the scale of its operations in the future, with the heady days of unconditional expansion by the multiples in the c-store sector apparently numbered. There is increasing pressure on the competition authorities to view c-store acquisitions in terms of the multiples' greater dominance of the grocery retail sector as a whole, rather than just as local acquisitions as has been the case in the past.
"The multiples are facing growing opposition from the independent store sector, with retail lobbyist the Association of Convenience Stores demanding that the competition authority, the Office of Fair Trading, conduct a full investigation into the impact of the multiples on small stores, farmers and consumer choice. If such an investigation goes ahead and comes out in favour of independents, King's plans for growth could be thwarted," said Millar.
Furthermore, many convenience store chains are now looking to inflate disposal prices due to the growing levels of interest being shown in the sector, according to Millar, as the division in the ranks of Londis shareholders showed earlier this year, with one group advocating a buyout by Ireland's Musgrave group and another urging store owners to hold out for a better - i.e. higher - offer from one of the multiples.
Convenience store retailing is becoming increasingly popular in the UK, not just for 'top-up' groceries like milk and bread but also, increasingly, for a wider range of regular grocery products. Shoppers are prepared to pay slightly more for their food if it means they can avoid the traffic jams to visit out-of-town stores.
Yet despite the high profile acquisitions made by the multiples, the sector remains dominated by independents trading under the Spar and Premier banners (the latter owned by the Big Food Group). Spar operates nearly 3,000 stores and Premier 1,750 outlets, according to Millar.
In contrast, Tesco has just over 1,000 stores, giving it around 3 per cent of the market, while Sainsbury has some 279 stores and a 1 per cent share - although this could rise to 1.5 per cent once the company has benefited from a full-year's trading at its new acquisitions, Millar said.
Sainsbury recently reported a 3.5 per cent increase in interim sales at the core supermarket division to £8.4 billion, with 2 per cent of this coming from the earlier c-store deals. Excluding these acquisitions and additional volumes from stores acquired from Morrisons after its takeover of Safeway, sales growth was a more modest 1.5 per cent, and in fact fell by 0.9 per cent when strong petrol sales were excluded.
