Supermarkets need to dramatically scale down their store estates if they want to stop haemorrhaging sales and return to growth, according to analysts at Goldman Sachs who sent a stark warning to the retail industry.
In a research note published yesterday, Goldman Sachs said Sainsbury’s, Tesco and Morrisons must cut space by around 20 per cent by 2020 in order to survive in today’s tough retail landscape, where discounters Aldi and Lidl are grabbing a greater share of the market and online shopping is proving ever-more popular.
“Our analysis of the UK grocery industry suggests capacity exit is the only viable solution for a return to profitable growth,” analysts said.
The US bank believes that like-for-like sales through larger stores will fall by around three per cent by 2020 – or around 18 per cent in total – and that earnings could also fall by 60 per cent between 2013 and 2017 if supermarkets do not face up to the issue of space.
“The shift away from large stores is likely to accelerate rather than reverse as millennials become core grocery shoppers,” it said.
Supermarkets have already taken steps over the past two years to put an end to a decade-long space race as customers spend less time and money in big stores and more online and in convenience stores. Tesco, Sainsbury’s and Morrisons have all taken write-downs on the value of their property portfolios, with Sainsbury’s last week reporting a charge of £287m because some its sites will no longer be developed.
However, Goldman Sachs pointed out that 50 per cent of both Tesco UK and Sainsbury’s stores are over 40,000 square feet in size and there was still much more to be done.
The analyst note casts a gloomy outlook on what has been a turbulent year for the supermarket sector, mired by profits warnings, high profile departures, and an accounting scandal at Tesco.
All big four supermarkets, led by Asda, have launched plans to invest hundreds of millions of pounds to slash prices of everyday products and have scaled back on capital expenditure. However Goldman Sachs believes “the major decisions that will shape the future of the UK grocery market are yet to be taken”.
Tesco and Sainsbury’s share prices edged down yesterday as the bank downgraded the two firms to a “sell”. However it took a more bullish view of Morrisons, citing its smaller-sized supermarkets and “the aggressive steps” already taken to address share losses. It upgraded the Bradford-based grocer to a “buy”, sending shares 1.1 per cent higher.