Investor lessons to learn following Tesco’s store closure announcement

Below is article written by Matthew Hopkinson of the Local Data Company, analysing the recent store closures announced by Tesco and the implications of this on the supermarket sector. View it online here

Clearly, as major buyers of convenience store property investments, this is of great interest to us, and understanding of the below issues reinforces our existing strategy of acquiring convenience stores in good locations within medium to large towns, generally in the South East. When buying such as asset, it is important to assess the local competition, whether that be by discount retailers or 'the big 4' supermarkets, as the well-documented 'race for space' may have resulted in saturation in even the strongest locations.

That said, the Tesco closures represent a fraction of their existing footprint, and given that they have conduction a thorough review of their portfolio, this does imply that they view the remainder of their portfolio as profitable or at least breaking-even - and that is good news for anyone buying or owning good quality convenience store investments:

Why has Tesco chosen the stores to close it has?

Tesco has now announced the 43 stores that it plans to close. Eighteen Express stores, 12 metro stores, seven superstores and six Home Plus stores. The closures will start taking effect from March.

What does it tell us about their location strategy when one looks at the stores set to close? These are my observations having run a quick analysis through the LDC slide rule insight tool LDO.

  1. It is a diverse portfolio by location and store type. That said the majority lie north of the Watford Gap!
  2. The health, be it based on the LDC/Morgan Stanley Health Index or looking at the vacancy rates, is varied so they are no ghost or destitute locations. There are a couple that do exist in weak locations with the stores in Runcorn, Bootle and Doncaster all having vacancy rates over 18%.
  3. Doncaster is the main loser as a town with the loss of two stores – a Metro and superstore.
  4. Analysis of the Metro stores suggests that intensity of competition might be a cause of closure as those listed are often close to an Iceland, Fultons or Heron Foods.
  5. Many of the Express stores are in small centres with small catchments so it does make one wonder if they were a store too far and a hangover for the race for space. Some, like Liverpool Kensington, are in very run down areas.
  6. A number of the locations are clearly experiencing cannibalisation as the Tesco presence has increased. For example Bicester, which is set to lose a Metro store already, has a large Tesco superstore and four Tesco Expresses.
  7. The Home Plus store closures will reduce this format in number by 50% and as such are we likely to see the closure of the remaining six later this year?
  8. A big question on all of these stores is does Tesco own the stores or are they on a lease? There will of course be a mix but where they are on a lease the question arise of will they be able to assign it and if they can will they be able to assign within the existing building consent? By that I mean will they close a Tesco to allow a competing food store to open in its place or will they just turn the lights off shut the door and allow the lease to run down?

What is clear from this decision by Tesco, and no doubt others will follow, is that there is over supply of food store space, whatever the format, and that we will see more churn in this sector than ever before. The intensity of competition, the cost to provide the level of service and supply customers expect and the increased cannibalisation of stores through over expansion. Bedlington is a case in point as it sits in a small town with a small population that has eight food stores to choose from which based on the population stats for the area equates to 1,925 people per store which cannot be sustainable especially when you take into account online grocery as well.

That said Tesco is a massive retailer and the image below of just its Supermarket network shows how dominant it is when it comes to stores on the ground. With this format they have 469 and in the last 12 months, whilst having closed four they have opened twelve. With nearly 4,000 outlets across Great Britain this reduction of 43 is a mere 1% of their footprint.

What do you think will happen with the other big players and how many more closures will we see and to what effect on our towns and communities?

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