Supermarkets are leaving the land to lie empty because it’s unprofitable to build new stores, new figures show
- Building is on hold across the country as shoppers turn their back on superstores
- Superstores could still fall back into fashion in five year’s time
- Shoppers are turning to convenience stores, budget supermarkets and online shopping instead of superstores
The big four supermarkets have 46.61million square feet of space that they had bought with the intention of building new stores. But just 2.8million square feet is being built on – 20 per cent down on last year, according to property agent CBRE. The empty land could be enough to build in the region of 13,500 family homes.
For years supermarkets raced to gobble up retail space up and down the country as shoppers continued to show an apparently insatiable appetite for large out-of-town superstores.
Changing habits: Supermarket chains were racing to buy up land and build superstores, but now construction is declining
But shopping habits are undergoing a sea change, leaving expansion drives and large retail spaces out of style. Households are increasingly ditching the ‘weekly shop’ for so-called smaller, ‘top-up’ shops, leading to the rise of convenience stores and falling sales at the superstores.
Shoppers are also turning to budget brands Aldi and Lidl, which is gnawing into the traditional supermarkets’ profits and leaving them with less cash to invest in new stores.
Shoppers are also warming to the convenience of online shopping, which also erodes the footfall at larger retail destinations.
The slow-down in sales and the shift away from a ‘space race’ among supermarkets for ever more and bigger stores presents retailers with a challenge about what to do with the land they had earmarked for expansion.
Changing habits: Out of town superstores are no longer in such demand and shoppers turn in increasing numbers to online shopping, convenience stores and budget supermarkets
Retailers have faced accusations in the past they have been hoarding land, which could find other uses such as housing.
While supermarkets sit on massive brownfields sites, Britain is facing a deficit of new homes that is pushing dreams of homeownership further out of reach for increasing numbers of families.
Rethink: The number of proposed supermarket sites has declined, while the number with planning consent but not under construction has risen
Britain needs around 230,000 new homes to be built every year to make up the current shortfall, although some estimates put the number considerably higher.
But to sell off the land bought for retail purposes for residential use could cost retailers billions of pounds.
Changing habits: Increasing numbers of shoppers are choosing to buy groceries in convenience stores, online or at budget supermarkets
‘If a business has bought five acres of land to build a supermarket, which it was expected to produce turnover of £50 – £60 million a year and then sold it for residential use, it would get nothing like the returns it was expecting,’ Chris Keen, director of supermarket leasing at CBRE, told This is Money.
‘There is a scarcity of suitable retail sites with planning permission so they are more valuable and typically more expensive than residential land.’
Sainsbury’s said in November that it was taking a £287 million hit to its profits after cancelling a number of new site plans, plus a £341 million writedown on existing stores which were showing little or no profit.
Meanwhile, there is speculation that market leader Tesco will also announce a large write-off on its property. Both firms publish trading updates this week.
However Chris Keen added that as house prices rise, particularly around London and the south east, some of this land is becoming more valuable as residential space.
Retailers will decide either to sell on their unused land, continue to sit on it in the expectation of building at a later date, or team up with a building developer to turn the land into homes. The third choice would be most likely where the retailer still plans to open some kind of store within the residential development, Chris Keen added.
The big four supermarkets still command the lion’s share of the UK grocery market, but Lidl and Aldi are making steady gains
But while shoppers appear to be growing out of love with supermarket superstores, they may not be out of favour for ever, he said.
‘This could just be a five-year blip,’ Chris Keen added. ‘Retailers are focusing on convenience stores and since they have a limited pot of capital expenditure, spending on superstores is declining.
‘The rise of convenience stores is a huge one-off opportunity for the retailers to grow into. The big four currently have just five per cent of the convenience stores in the UK – including corner shops.’
He added that retailers are throwing all their resources at this market because only a few will manage to get a large enough share of the market to achieve economies of scale to make it viable.
But once this market reaches saturation, retailers will go back to superstores, which are still more profitable.
New opportunities: The big four are racing to open convenience stores while larger store openings are stagnating
You need 15 convenience stores to generate the same profit as one proper supermarket, Chris Keen said.
As new housing developments are built new markets will also open up for larger- style stores. It takes a new development of just 3,000 houses to support a superstore.
Tesco, Sainsbury’s, Morrisons and Marks & Spencer will all report their Christmas trading figures this week, and are expected to unveil a sales slump, laying bare the pressure grocers and retailers are under.
Transformation: The make up of our supermarkets has completely changed since 1993
New Tesco boss Dave Lewis will set out his plans to turn around the fortunes of Britain’s biggest supermarket when it publishes latest trading figures on Thursday.
Details of his plans are expected to be unveiled alongside a trading update which will include third-quarter figures as well as Tesco’s subsequent six-week performance covering the key Christmas period.
In demand: Housebuilding in the UK has been on a downward trajectory since the 1970s (using DCLG data)
It is expected to reveal more sliding sales to book-end a dismal 2014 which saw the departure of Mr Lewis’s predecessor Philip Clarke as well as a £263 million accounting scandal and a series of profit warnings.
Meanwhile Marks & Spencer’s results are due on the same day, Sainsbury’s will report a day earlier on Wednesday and Morrisons reports next week.
There are plans to build supermarkets across the country (orange markings on left-hand map), although very few are under construction (shown on the right-hand map)