March 31, 2011

Mike Greene talks Tesco & convenience

Mike Greene, CEO of him! UK London (photo: Mario Vedder)
Mike Greene: "The more consumers order on the internet, the more top-up shopping there will be"
German retailers are increasingly testing new c-store concepts, and Rewe Group is the latest one to do so.

Germany's second-largest grocer, plans to launch a 130m² convenience store format under the "Rewe to go" banner in Cologne at the end of April.

Of course, Rewe has dabbled in convenience before, but mostly abroad. For instance it runs “Billa Box” neighbourhood stores in Vienna and the Czech Republic.
  
Will superstore and discount operator Rewe be successful with the new concept in Germany? One way of answering this question is to look at how pioneering convenience store operators such as Tesco have fared in the UK since the early 90s. 
 
British convenience guru Mike Greene, CEO of him! UK London, gives his views in an interview with Lebensmittel Zeitung.

In view of the increasing friction between Tesco and independent members of the Association of Convenience Stores (ACS), we also asked the UK Competition Commission whether thy had "given the nod" to UK food multiples?

An international phenomenon 

Many major retailers outside Germany are also experimenting with c-stores.

In Switzerland, retail giants Migros and Coop Schweiz operate “Migrolino” viz. "Pronto".

In France, Carrefour now has no less than four convenience concepts (“Carrefour City”, “Carrefour City Café”, “Carrefour Contact”, “Carrefour Express”).

These developments are echoed within its peer group: “A2pas” (Auchan); “L” (Leclerc); “Chez Jean”, “Daily Monop’”, “Les surgélés”, “Petit Casino”, “Sherpa” (Casino).

In March, Dutch retail giant Ahold expanded its “AH to go” chain beyond national borders into Belgium and may also enter Germany. In the UK, “Little Waitrose” and “Sainsbury's Fresh Kitchen”, a stand-alone fast-food concept, both started in London earlier this year.

Clearly, planning permission has been liberalised in several major countries over the last decade (cf. the Loi sur la Modernisation de l'Économie in France).

Reaction to changing consumer habits

However, many retailers throughout the world are trying to respond to such consumer trends as snacking and grazing, less meal planning, declining cooking skills, as well as the increasing number of working women and single households.

Simultaneously, high petrol prices and a general revolt against large impersonal stores make customers look for local, smaller-scale alternatives.

The general marketing term “convenience” was coined nearly a century ago in the USA and its origins are almost synonymous with the name of 7-Eleven. However, British multiples were the first in Europe to incorporate convenience elements within their stores.

Big Brother on the High Street
 
Today’s UK market leader Tesco launched convenience and petrol forecourt formats under the “Metro” and “Express” banners as early as 1993 viz. 1994.

This fascinated German retailers at the time because, until then, convenience had been the exclusive domain of the multi-national mineral oil companies and specialist delivered wholesaler Lekkerland.

But how has Tesco fared with these concepts in the interim? The company’s frequent purchases of c-store, tobacconist and newspaper chains (T&S Stores, One Stop, Dillons, Adminstore, Europa, Cullens, Harts the Grocer, Mills) since 2002 have only increased its already overwhelming share of the UK grocery market by around one percentage point.

They have also made Tesco’s retail brand ubiquitous on the High Street – much to the fury of the Association of Convenience Stores (ACS). Given the “Big Brother” effect this has created in parts of the media and with some local residents, was the gain in market share really worth the negative PR?

INTERVIEW


Mr. Greene, a look at Tesco’s “Metro” 18 years since the first store opened in London in 1993 reveals a convenience concept which, apart from inevitable changes in its own label assortment, doesn’t seem to have made any tremendous advances?


In broad terms I would agree with you; however, I wouldn’t call Tesco Metro a convenience store. Convenience hasn’t been their focus at all. It is the Tesco Express format which has really grown to over 1,000 stores and which continues to grow.

How did Tesco Express expand so quickly since its inception in 1994?

Essentially through acquisitions; in 2002, for instance, Tesco purchased One Stop, which was historically a newsagent and which they have evolved considerably. In mid-February 2011, Tesco received approval from the Competition Commission* for the purchase of Mills group, a chain of 76 convenience stores owned by Nigel Mills in the north-east of the UK. Some of these will be rebadged to Tesco Express and some to One Stop.

Why the commitment to small c-stores when Tesco has grown so strongly in the UK by extending non-food ranges within its Extra hypermarkets?

The constraints imposed by planning permission make it harder for Tesco to get the store size it would ideally want. Also, people’s life styles are changing, which means that they shop more often, but for smaller amounts. Smaller stores are therefore better suited to consumers’ future needs. Certainly, if you speak to the under 25s, they don’t do big shops.

Tesco Express seems to have been extended beyond petrol forecourt shops to include High Street c-stores?

Yes; Tesco still runs a lot of sites with joint-venture partner Esso, but more sites now would be stand-alone on the High Street or in neighbourhood locations.

So, how do the “One Stop” stores fit into the Tesco convenience portfolio?

When Tesco bought the One Stop chain in 2002, it converted some of the 600-odd stores but kept others as One Stop. When the latter hit certain thresholds, Tesco converts them to the “Express” format.

How about pricing?

Tesco’s convenience formats offer a price index of around 104, i.e., about 4 per cent higher than Tesco’s usual prices. However, until the recession hit a few months ago, Tesco did seem to be trying to get a bit more in specific categories.

If it can’t charge considerably more at its c-stores, how does Tesco make any money? After all, such small outlets don’t offer any significant economies of scale and are costly to deliver…

You shouldn’t forget that Tesco Express branches achieve three to four times the annual revenues of an average c-store in the UK. The minimum would be £40,000 (€45,491) a week and some are comfortably over £100,000 (€113,727).

They also have a higher margin mix than the average supermarket. This includes impulse lines and fresh foods including bakery, dairy, deli, fruit & veg etc. In addition, the customer through-put at Tesco Express is higher than at the average c-store. If you add to all this the multiplication factor arising from well over 1,000 stores, then the maths certainly begin to add up.

How many lines do Express and One Stop carry?

It wouldn’t be as many people think. It would probably be around 3,000 to 4,000 lines at Express and 2,000 to 3,000 in a One Stop. The name of the game in convenience is, namely, not the total number of lines, but availability and the number of facings.

At the end of the day, do you think that Tesco made a good or a bad move by diversifying towards convenience?

It was a necessary move, and they would have lost a lot of business to the small-format sector if they hadn’t have done so. We have been tracking shoppers and shopper trends for many years and speak to more than 100,000 shoppers a year. Over the past 10 to 15 years, we have found that shoppers are visiting smaller shops more often and that big shops are dying. J. Sainsbury, Asda and Morrisons are therefore also looking at smaller formats.

To what extent has the growth of Tesco.com and internet shopping in general benefited the trend towards convenience shops?

A lot; as e-commerce develops people don’t want to go to supermarkets so much. Also, you can’t internet shop for distressed, impulse or treat purchases. So the more consumers order on the internet, the more top-up shopping there will be.


Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 13, 01.04.2011
 
  
  * Response from the Competition Commission to our question as to whether the investigation into UK supermarkets in 2000 could have been interpreted as a green light for Tesco and other grocery multiples to enter the convenience sector:

"The CC completed an investigation into the UK Supermarkets in 2000. Amongst its findings in defining supermarkets was one that weekly/one stop shopping differed from convenience or “top up” shopping. Here’s the report summary for reference: http://www.competition-commission.org.uk/rep_pub/reports/2000/446super.htm#summary

Not sure this gave the ‘green light’ for Tesco or others to enter the convenience sector. All takeovers of that size are still examined by the Office of Fair Trading and our reports do not set precedents in that way – although it may have been a factor when they assessed cases when multiple retailers took over convenience retailers.

It’s worth noting that at the time of the 2000 report, the big supermarkets had virtually no foothold in convenience shopping and their decision to enter the sector was – (one might presume) - more influenced by planning regulations then anything else, which made it easier to open a small store in a town centre than a large one out of town.

The other thing that’s worth noting is that if you look at the grocery market as a whole, then one retailer taking over some convenience stores makes far less of a difference to market share than if you sub-divide that overall market.

We completed another investigation into UK groceries in 2008, report here: http://www.competition-commission.org.uk/inquiries/ref2006/grocery/index.htm

The findings on market definition in 2008 were more nuanced – whilst large supermarkets certainly exerted a competitive constraint on small convenience stores, it wasn’t the same the other way round as small shops can scarcely compete on range etc – asymmetric competition to use the technical term.

We did note the entry of some of the big grocery retailers into convenience stores and whilst acknowledging the concerns some had voiced also stated that this has brought greater competition into that particular market sector -- which was ultimately to the benefit of consumers."


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