Comment: Retaining the ‘super’ in the supermarket sector

Elspeth Carson, commercial real estate partner at Morton Fraser LLP, looks at supermarkets’ challenges and opportunities in an evolving, competitive market.

Sainsburys has been dabbling with the till-free supermarket concept. Picture: Sainsbury's.

The Scottish retail scene has been hit harder than most in the recent past, with our high streets experiencing all-too-frequent reminders of the challenges facing the sector.

The supermarket trade is certainly not immune. Recently sharing its annual results was Sainsbury’s, whose failed bid to merge with Asda cost it £46 million. With profits decreasing by 42 per cent, it is clear how hard it has become to compete on multiple fronts.

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Whether it’s fighting off price-competitive rivals like Aldi and Lidl, finding money to invest in the store experience for ever-more demanding consumers, or backing the right technology to both compete online and deliver new services, it is a testing time for the big four supermarkets.

In Scotland, the competition is heating up and shoppers should start to see the benefits. Aldi is opening eight new stores this year, while Lidl recently invested £78m in a new distribution centre near Motherwell. Both discounters are creating jobs while also championing their commitment to Scottish suppliers.

It seems that the Sainsbury’s merger with Asda fell foul of the Competition and Markets Authority (CMA) in order to further stoke the fires of competition. Given the relative lack of overlap between their store locations here, had it been a Scotland-only decision, a different outcome could well have been possible.

The CMA decision has already changed industry rhetoric. The talk is of greater investment in 400 of Sainsbury’s stores, and of a greater focus on technology. This comes off the back of a resurgent Tesco performance after several years of plight and Marks & Spencer investing in online food sales through a joint venture with Ocado. Innovation and investment are good news for shoppers. The Scottish planning system is fairly straightforward and should not hinder investment in new stores. If anything, we will start to see more appearing in our towns and city centres as convenience and “express” shopping becomes more popular. This brings the major supermarkets into competition with community-driven co-operatives as well as independents, offering us all greater choice and price competition.

Scottish suppliers should also benefit from a competitive retail landscape. All the supermarkets are keen to emphasise the local provenance of their food products where they can.

Indeed, the increased buying power of a merged Asda and Sainsbury’s would have influenced the CMA decision to block the deal. Very few would support increasing price pressure on Scottish food-producers, many of whom would have had to resort to cutting costs or taking shortcuts to preserve their margins. It is also possible that increased price pressure on farmers would have affected their environmental efforts as well as their ability to invest in technology. Property investors will be watching these trends closely. Supermarket-leased assets represent good value and reliable income with attractive yields. Having been through some difficult years, the sector is improving its covenant strength and many will be looking to exploit this upturn in fortunes.

That said, the future for supermarkets is still uncertain. The high street continues to flounder, particularly in Scotland, and the bigger players have cut costs dramatically to respond to greater competition from all quarters. British Land recently offloaded its substantial investments in Sainsbury’s larger superstores, which should serve as a warning that investors are yet to be convinced in the longer-term fortunes of the sector.

This should come as no surprise when we see the sector ebbing and flowing from one extreme to the next. When a major challenger opens its 98th Scottish store just three months after an entire shopping centre in Kirkcaldy goes to auction with a reserve price of only £1, conflicting perspectives are bound to exist.

Such uncertainty shouldn’t prevent growth and success. Shoppers may ask more of their supermarkets than ever before – convenient locations; easy online experiences; home-grown produce; cheaper prices; more choice – but there is room for change, and opportunity to exploit.

To return to Sainsbury’s, the supermarket powerhouse is not looking backwards. Only last week, it launched the UK’s first-ever till-free supermarket, asking shoppers to scan items using an app and pay with Google or Apple Pay. It follows in the footsteps of the Amazon Go concept store in Seattle and could be a sign of things to come – it claims a further 100 stores could replicate the model next year, some of which you would hope will be in Scotland. With store refurbishments, new concepts, better online offerings and more choice to come, if the supermarkets can survive this period of change it is highly likely we will all be winners.