A SHIFT in strategy by Britain’s major grocers to focus on small local stores that offer higher returns than big supermarkets, is allowing them to cut capital expenditure plans – and dangle the prospect of tasty returns for shareholders.
Market research firm Mintel forecasts Britain’s convenience sector sales will grow 5 per cent to £43.3bn in 2013 and jump to £54.1bn by 2018. Since the economic downturn, careful consumers now prefer to buy little and often and do so in the shop around the corner rather than out-of-town superstores, to save on the rising cost of petrol.
Recognising that small local convenience stores, along with the internet will be the main driver of future sales growth, market leader Tesco, Sainsbury – battling with Wal-Mart Stores’ Asda for second place – number four player Wm Morrison and number six Waitrose are all prioritising investment there.
Both convenience and online business require relatively little capital compared to developing large supermarket spaces. But crucially, while the profitability of online grocery is not yet proven, the returns from convenience stores can be.
“We typically get about one and a half times that of a supermarket,” Sainsbury’s chief financial officer John Rogers said, referring to ‘Sainsbury’s Local’ returns.
Taking account of the fact that the convenience stores are leased – generally as a small part of a larger site – that equals a 16-17 per cent return on capital employed (ROCE). Tesco does not break out the ROCE for its UK convenience stores but has said it is its highest returning format.
The major listed grocers have underperformed the overall stock market by about 7 per cent so far this year. But because the stores they are now investing in cost so much less than supermarkets to develop and run, the likes of Tesco and Morrisons are tempting investors instead with the prospect of higher dividends, and possibly share buybacks too.
Tesco – and Sainsbury’s – currently offer a dividend yield of 4.4 per cent, while Morrisons offers 4.7 per cent. That already compares favourably to an average of 4.0 per cent across the FTSE 100 index, and it could rise.
“If they are spending less and have surplus capital it would be nice to see higher dividends or share buybacks,” said one institutional investor who holds shares in Tesco, Morrisons and Sainsbury’s.