Supermarkets turn up the heat on Home Retail
(Reuters) - Plans by Britain's top supermarkets to ramp up
growth in non-food markets could help their traditionally defensive
stocks to thrive in an economic recovery and pile pressure on firms
like Home Retail and Marks & Spencer.
Tesco (TSCO.L), already Britain's biggest non-food retailer,
is best placed to grab more market share compared with supermarket
rivals Asda (WMT.N) and J Sainsbury (SBRY.L) thanks to
its scale, experience and range of goods and services.
But all three should benefit from offering their millions of
customers the convenience of buying keenly priced non-food goods
with their weekly grocery shop, whether in-store or online, and
lifting service standards towards those of specialist
chains.
That could help drive a reassessment of UK food retail shares,
which are currently trading at 12.7 times earnings forecasts for
2010-11, just below the average for UK non-food retailers,
according to Reuters data.
"I think they can probably all win," said Verdict Research analyst
Neil Saunders of the grocers' plans in non-food.
Verdict forecasts that supermarkets' share of non-food spending in
Britain will rise to 14.9 percent, or 26 billion pounds, by 2013
from 12.2 percent in 2008.
"The threat in all of this is to Argos," Saunders added, referring
to Home Retail's (HOME.L) chain of general merchandise stores which
are built on a model of convenience and low prices.
There are also growing risks to mid-market clothing chains like Bhs
and Marks & Spencer(MKS.L), though the latter could be
shielded by a higher reputation for quality, he said.
TESCO VS ASDA
Britain's grocers have been pushing into non-food markets for
years, attracted by higher profit margins than on groceries, and
growing evidence of success during the recession has encouraged
them to accelerate their plans.
Grocery specialist IGD estimates that sales of non-food items at UK
grocers rose 6.4 percent last year, compared with a 0.8 percent
fall at other retailers.
Asda, Britain's second-biggest grocer which is owned by U.S. retail
giant Wal-Mart (WMT.N), last week set a target to become
the country's biggest non-food retailer by building up a chain of
150 standalone Asda Living stores over the next five
years.
Sainsbury said last year it planned to double its sales of non-food
ranges over five years, while Tesco said on Tuesday 20
April it saw huge opportunities in general merchandise and
clothing.
"The potential upside is substantial, given that these are large
and fragmented markets and that the authority of our offer both in
store and online is improving markedly each year,"Tesco Chief
Executive Terry Leahy told reporters.
Execution Noble analysts think Tesco's scale -- it will have
over 200 of its large format Extra stores in Britain next year,
compared with about 30 Asda Supercentres -- and its more
ambitious expansion plans make it best placed to
succeed.
They calculate Tesco will add more non-food selling space
than Asda over the next three years, and more space
overall than Sainsbury and industry number four Morrison (MRW.L)
combined.
Tesco, as the world's fourth-biggest retailer, can also benefit
from its global buying scale and the breadth of its offer, which
includes growing telecoms and financial services businesses, as
well as its popular Clubcard loyalty scheme.
But not everyone is convinced it will see off its
rivals.
Bryan Roberts, global research director at Planet Retail,
thinks Asda and Sainsbury have a big advantage with
stronger clothing brands in George and Tu respectively.
He also reckons Asda can outgun Tesco's global
buying power as it works more closely with
parent Wal-Mart.
Asda faces a big challenge, however, in setting up
standalone Asda Living stores, which will not have the
benefit of customers coming in anyway to buy groceries, and not
everyone thinks it has got the formula right.
"We visited an Asda Living store but came away a little
disappointed and had rather unsettling images of a store that
looked a bit like a big Woolworths," the Execution Noble analysts
said referring to a chain that went bust in early 2009.
ARGOS UNDER FIRE
Asda has long been tipped as a bidder for Home Retail as it
looks to close the gap on Tesco. But its plans to build up its
own chain of non-food stores have turned Asda from a
potential saviour to a major threat to Home Retail's Argos
business.
"In the U.S., Wal-Mart has killed off catalogue showroom
operations like Argos, and in the UK, Asda seems to want
to do the same," said Arden Partners analyst Nick Bubb.
While Argos has so far staved off the threat with a "multichannel"
strategy that allows shoppers to buy online and collect goods in
store or have them delivered to homes, grocers are now ramping up
their own "click and collect" offerings.
"Argos have been stemming the tide rather than putting a lot of
distance themselves and the supermarkets. They're only going to
face tougher competition," said Planet Retail's
Roberts.
Verdict's Saunders thinks the success of George and Tu shows
grocers can create aspirational brands that will extend their
appeal beyond just low prices and mass-market goods and turn them
into a greater threat to more specialist retailers.
"They will trade customers up the value chain and they will take on
specialists in their respective areas," he said.
He pointed to initiatives like Tesco's 1,000-strong team of
technical advisers, which aims to replicate the advice provided by
specialist electrical goods retailers like DSG (DSGI.L), and
to Asda's "Mother, Baby and Child" offering which will step up
the challenge to specialists
like Mothercare (MTC.L).
(Editing by Sitaraman Shankar)