U.K.'S SUPERSTORE RULE SPARKS SMALLER FORMATS

JAMES FALLON

LONDON (FNS) -- British food retailers are rushing to devise smaller store formats in the face of tighter government regulations on the opening of out-of-town superstores.

The regulations, which began to bite about two years ago, have caused a sharp slowdown in the superstore development programs of the United Kingdom's leading food retailers Safeway U.K. and J. Sainsbury plc, both based in London; Tesco in Cheshunt; and ASDA in Leeds. These companies saw their profits and sales boom during the '80s as a result of superstore opening programs that in some cases reached up to 30 stores a year.

But the tighter regulations -- which require retailers to look for city-center and edge-of-town sites before applying for planning permission for a large out-of-town location -- have caused them to scale back their store-development programs to as few as 10 new superstores annually. They also have contributed to a change in the market's dynamics, with retailers' growth coming mainly through tiny gains in market share rather than store openings.

"Superstore saturation has grown to a significant degree now and the planning regime is much tougher," said Richard Hyman, chairman of consultants Verdict Research, London. "It's become a game of marginal gains, and one way to do that is to return to opening city-center stores and other smaller formats."

Most of the retailers' efforts over the last decade have been focused on opening superstores of up to 60,000 square feet in size. These stores enabled the companies to add such departments as home entertainment, health and beauty, dry cleaning and even banks and post offices to gain additional revenue sources. They also helped British food retailers become the best in the world in terms of logistics and systems to serve these larger stores.

But the growth of the superstore -- and the arrival of such complementary formats as warehouse clubs -- created concern in the British government that these formats would eventually overwhelm city-center stores. The government began implementing the tighter planning regulations about four years ago, but these didn't really start to slow down superstore openings until the last 18 months because of the length of the planning and development process.

Now Tesco, Sainsbury's and Safeway are shifting their focus to smaller formats to enable them to maintain their store-opening programs at about 30 a year. "We haven't given up on the superstore; we're building about 15 a year and hope to maintain that," said Steve Webb, director of corporate development at Safeway. "But we now are looking at smaller catchment areas than perhaps we would have in the past."

Safeway, along with its competitors, is developing two formats to adjust to the change in regulations. One is a smaller store of about 15,000 square feet located in small- to medium-sized cities and towns without a superstore nearby. The other is a joint venture with the gas station operator BP to open convenience stores attached to BP gas stations. These stores average about 2,000 to 3,000 square feet. Safeway and BP have been testing the format for the last six months and are now preparing to roll it out.

Tesco has a similar format, called Tesco Express, but with its own gas stations. It was the first to launch city-center sites in large cities, opening its Tesco Metro format in 1994. There are now 15 Tesco Express and 36 Tesco Metro stores in the United Kingdom, a spokesman said.

Sainsbury's so far hasn't launched a convenience-store format, but it has introduced a store layout, Sainsbury's Central, aimed at cities and towns with as few as 20,000 households and with no nearby superstore. "We've not addressed that size of market in the past," a spokeswoman said. "In the past people were inclined to travel to a superstore to do their shopping, but now they are less likely to do so. It's a question of convenience."

All these smaller formats offer only a selection of the product lines available in a superstore, with hardly any ancillary products such as home entertainment. They also place a greater emphasis on prepared and convenience foods, a market which up to now has been dominated by Marks & Spencer. Tesco, Sainsbury's and Safeway now are aiming to capture a greater share of this convenience market. "We're going after more of the top-up shopping that used to be done at the corner shops," one industry official said.

In addition to these new formats, retailers are increasing their store refit programs to add space to existing stores. Safeway is spending about $160 million (100 million pounds) a year on store refits and expansions, Webb said, adding that this is double the level of three years ago. Tesco and Sainsbury's are investing similar amounts. All three operators stress they never gave up on city-center or edge-of-town sites; a Sainsbury's spokeswoman said more than 60% of its stores are in city-center or edge-of-town locations, while Tesco has 220 compact stores in such areas, compared with 300 superstores.

And while the tighter planning regulations have slowed the development of superstores, they also have limited the growth of warehouse clubs. Price/Costco, which was the first to develop the market in the United Kingdom, has performed well since it arrived here four years ago, but local operator Cargo Club has gone out of business. Price/Costco currently has five clubs in the United Kingdom and is building another two. Hyman said each of the stores has sales of about $80 million to $90 million, which is close to his original forecasts.

"Warehouse clubs have not had as big an impact here as people anticipated for two reasons -- the tighter planning rules, and also people over anticipated what they would do," Hyman said. "Price/Costco said all along that they weren't retailers, but people judged them as ones. Their maturity cycles are much longer than a retailer's. Price/Costco hasn't set the world on fire, but it's doing OK and remains focussed on the small-business customer. Because of that, it will never be a threat to the general food retailer."

That retailer's focus over the next few years increasingly will switch to the new formats now under development rather than the superstore. While executives and analysts stress the superstore is far from extinction, they added that the balance of future store openings will tilt toward smaller units. The Sainsbury's spokeswoman, for example, said the percentage of the company's stores in city-center or edge-of-town locations is bound to grow rapidly over the next few years as fewer superstores are opened.

This switch will cause all the operators to develop new operating procedures in terms of logistics, distribution, information systems, staffing and product assortment.

"The returns on these smaller stores can be quite good, in some cases even better than at superstores," said Mike Dennis, a food retail analyst at Natwest Securities, London. "All the food retailers will be throwing off increasing amounts of surplus cash over the next few years and they will need to reinvest it to grow their core businesses. One way is through smaller-format stores in markets they never previously addressed. These city-center and convenience-store formats are not going to be a short-lived thing."