NEW STORE LAYOUTS THE ANSWER FOR U.K. FOOD RETAILERS

JAMES FALLON

LONDON (FNS) -- British food retailers are penetrating every nook and cranny seeking customers.

The U.K.'s leading companies are generating a range of new store formats designed to attract consumer spending. The formats range from small convenience stores to hypermarkets offering a large selection of food and nonfood products. The physical stores are in addition to the growing penetration of e-commerce in food retailing in the U.K., led by Tesco plc of Cheshunt, England, but also including J. Sainsbury plc here and Asda, the U.K. subsidiary of Wal-Mart Stores.

The last few months have seen an acceleration of the trend as retailers jockey for market share. The moves have included:

Asda's plan to spend $677 million on store development in the U.K. this year, including the opening of more Asda Wal-Mart Supercenters;

The announcement by Sainsbury of plans to spend $1.45 billion on its London stores over the next three years, including new stores and refurbishments;

Marks & Spencer plc's trial of a new convenience-store format and continued development of its Neighborhood stores;

Plans by Safeway plc, Hayes, England, to open a chain of hypermarkets carrying both food and nonfood;

Tesco's continued rollout of its Tesco Metro center city and Tesco Express convenience store formats as well as its drive to build nonfood sales through its Web site and new format Tesco Extra stores.

"These companies now want to own food retailing wherever it is," Richard Hyman, chairman of London-based consultants Verdict Research, said. "The market is maturing and they have to drive bigger volumes wherever they can get them."

The moves represent a major change in attitude among the companies, most of which focused on opening larger and larger superstores on out-of-town or edge-of-town sites throughout the eighties and nineties. The aim was to avoid the high costs of property in center cities and to grab more and more of consumer spending by growing such additional categories as toiletries, music and videos, dry cleaning and pharmacies.

But the mid-nineties saw the introduction of tighter planning restrictions, which put the brakes on many store development programs. Suddenly food retailers, which had typically opened 10 to 20 new superstores a year, found they could only receive planning permission for five or six. The restrictions introduced significantly more price competition in the U.K. as retailers had to find other ways than new store openings to generate growth and gain market share.

As such smaller retailers as Kwik-Save, Budgens and Somerfield stumbled or went out of business in the late nineties, the bigger companies saw an opportunity to re-enter center city locations. The move also was driven by the continued growth of Marks & Spencer's food retail sales. The company launched a freestanding food retail format of about 10,000 to 15,000-square-feet in the nineties that helped fuel its growth. These freestanding stores were in addition to the larger food halls attached to Marks & Spencer's clothing stores.

Marks & Spencer recently confirmed plans to open two convenience stores in suburban London in May. The stores will average 3,000-square-feet and will sell about 1,500 to 2,000 products, focusing on prepared meals, sandwiches, fresh produce and frozen foods. Marks & Spencer sees the potential for up to 40 such stores throughout the U.K.

It also is rolling out its new concept for its larger Neighborhood stores, which average 8,000 to 10,000-square-feet and usually include an in-store bakery and a butcher. The new concept currently is in 25 stores and will be added to 50 more stores this year, Roger Holmes, the head of the company's U.K. operations, said.

Marks & Spencer currently has about 2% to 3% of the U.K. food retail market but it's a segment that is increasingly being targeted by other companies. Tesco led the way, introducing its smaller Tesco Metro format about a decade ago. It added its Tesco Express convenience store format at about the same time through a joint venture with Esso. Tesco plans eventually to have about 150 Tesco Express stores throughout the U.K. It also will open about 19 Tesco Metro stores this year, Terry Leahy, the company's chief executive, said late last year.

Although its executives were initially skeptical of the economics of smaller stores, Sainsbury's eventually followed Tesco's lead with its Sainsbury Local format. It also remodeled some of its stores of 10,000-square-feet and up to its Sainsbury Central format with a smaller selection of fresh and packaged foods. The company currently has 18 Local stores and eight Sainsbury's Central stores, a spokeswoman said.

Sir Peter Davis, Sainsbury's chief executive, said the company's aim now is to go wherever its customers are. Its plan to spend $1.45 billion on its London stores will include the opening of 27 stores over the next three years. Of these, 20 will be Local stores, two will be Central stores and five will be supermarkets, Davis said.

Concurrent with the move into center city locations, though, has been an increasing drive by many retailers to open large hypermarket formats. The move stems primarily from Wal-Mart's $10.8 billion acquisition of Asda 18 months ago. Most of Asda's stores average 60,000-square-feet in size and Wal-Mart has been increasing the nonfood offering at Asda. Its goal is eventually to have 60% of sales through nonfood products and 40% through food. The ratio was reversed as Asda prior to the Wal-Mart deal.

Asda also is rolling out its Asda Wal-Mart Supercenter concept, which averages 75,000 to 100,000-square-feet. The first of these opened in Bristol, England, last July, with two more opening late last year. Another three will be added in 2001, a spokesman said, and the goal is to have 10 Supercenters by the year 2005. Asda also is introducing smaller Asda Fresh stores, which average about 25,000 square-feet and focus on fresh and prepared foods with no nonfood products. There currently are three Asda Fresh stores.

Tesco has responded to Wal-Mart's arrival in the U.K. with its Extra stores of 60,000-square-feet and up. The first of these opened last year and it expects to have two to three more this year. The stores fit in with Tesco's aim to generate nonfood sales of $7.2 billion a year by 2002, Leahy said.

Safeway also is moving to increase its nonfood sales. The company plans to open up to 70 hypermarkets offering food and nonfood products. The first of these will open this year and Safeway plans to convert 25 existing stores to the format over the next two years, Carlos Criado-Perez, its chief executive, said. The stores will be more than 50,000-square-feet in size.

"The future fortunes of the major food retailers will be heavily influenced by the nonfood arena," a food retail analyst in the U.K. said. "The extent they can really penetrate it will be limited but they have to grow their margins and their volumes and nonfood is the way to do it."