By Saabira Chaudhuri
LONDON--Changing customer behavior has left Britain's biggest
grocers in a property pickle.
The GBP4.7 billion ($7.05 billion) property write-down that
pushed the U.K.'s largest retailer, Tesco PLC, to report the
steepest loss in its 96-year history on Wednesday is emblematic of
a problem hurting retailers on both sides of the Atlantic:
Customers increasingly shop online and favor convenience over
"destination" trips to sprawling superstores.
In the U.K., that trend has helped drive traffic toward hard
discounters Aldi Stores Ltd. and Lidl UK GmbH, which have gained
market share at the expense of larger players. It has
simultaneously forced Britain's supermarkets to open hundreds of
convenience stores as customers shop through the week in smaller
quantities.
Tesco, for instance, has 1,735 convenience stores in the U.K.,
compared with just 17 in 1999. That rise has come even as the ranks
of its largest stores--those between 60,000 square feet and 120,000
square feet--have ballooned to 250 from just five in 1999.
On the other side of the pond, retailers have also moved to
adapt to changing customer behavior. Last year, for the first time
in its history, Wal-Mart Stores Inc. opened more smaller grocery
and convenience-type stores than supercenters. The retail giant's
stores now double as pickup stations for shoppers to collect
televisions, bicycles and other items purchased online-- an area
where it is reaping lessons from its U.K. unit, Asda.
In Britain, slumping sales have translated into property
impairments for Tesco's rivals as well. J Sainsbury PLC in November
said it had taken a GBP628 million charge tied to impairments on a
number of stores and its decision to not go forward with certain
property projects. Wm. Morrison Supermarkets PLC last month took a
GBP1.27 billion property-impairment charge.
"There is been a space race for years, which started to slow
about 18 months to two years ago," said Tom Edson, retail director
at property company Jones Lang LaSalle, of Britain's four largest
supermarket chains. "The large stores are the key question, and
what the big four are going to do with them."
Tesco earlier this year said it had scrapped plans to open a
string of superstores. It has also closed 43 unprofitable stores
this year, but just six were of the superstore variety.
That is barely scratching the surface of what needs to happen if
estimates by Goldman Sachs hold water. The New York investment bank
has estimated that the U.K.'s three largest publicly traded
supermarket chains need to cut about 20% of store space to return
to profitability.
The chief executive officers of Britain's largest supermarkets
have staunchly defended physical space. "Retail space of whatever
kind still has a place in this market," Asda Chief Executive
Officer Andy Clarke said in February. "A majority of customers
still want to come in and do a weekly shop."
Tesco Chief Executive Officer Dave Lewis said in a Wednesday
conference call that the retailer isn't closing more stores because
he believes they can be turned around. "The trend is convenience,
but what's more convenient than going to one place where you have
everything you want at a price that is competitive and the service
is excellent?" Mr. Lewis said.
Supermarkets are thinking creatively about how to draw people
back to their flagging stores. Tesco in 2013 bought the Giraffe
restaurant chain, this month acquired in full the Euphorium bakery
business, and owns a stake in the Harris + Hoole coffee chain. The
brands can be seen across many of its stores.
At the company's enormous Wandsworth store, customers can get
their eyes tested along with buying clothes and groceries. The
store also has a pharmacy, a travel-money bureau, a carwash and two
cafes. People can also do yoga or take cooking classes in a Tesco
community space. Another Tesco superstore, at Stockton-on-Tees, has
let some of its space to the gym chain Xercise4Less.
Sainsbury's, which has identified 6% of its space as being
excessive, in January struck a deal with catalog retailer Argos
Ltd. allowing it to open 10 concessions in Sainsbury's stores. The
grocer also has concession deals with dozens of other retailers,
including camera company Jessops PLC, and travel agents such as
Virgin Holidays Ltd. and Thomas Cook Group PLC.
Britain's third-biggest supermarket chain by market share has
also been building apartment blocks above its stores and developing
surrounding areas, which naturally drives traffic to a store. In
South London, the retailer is building 737 new homes, a new
Sainsbury's store and 27,000 square feet of local shops,
restaurants and office space. In May, Sainsbury's will open a
refurbished store in Fulham Riverside, flanking the Thames in
London. The new store is 50% larger than the previous one, and adds
462 new homes. Sainsbury's expects to make about GBP200 million
from the two new developments.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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