Supermarkets shopping for growth

THE lines have been drawn for the next battle between Britain's leading supermarkets. But for once, the hostilities are not about price cuts. Last week, as each grocer claimed victory with their Christmas trading figures, investors looked for clues to the next source of growth.

Market leader Tesco reported like-for-like sales - those based on the same stores - up by 4.6%, compared with 5% at Sainsbury and 4.1% at Safeway. But while the figures were well received by the City, there is an overwhelming feeling that the grocery chains will find it increasingly difficult to sustain momentum.

Faced with low growth in food retailing and pressure on profits from aggressive discounting, they are being forced to look elsewhere for new sources of profit.

They have all turned their attention to non-food items, from clothing to entertainment products. The supermarkets are now spending more than £3bn a year on new and revamped stores, with up to 30% of the space dedicated to non-food items. Richard Hyman, chairman of retail analyst Verdict, said: 'The pressure is on for supermarkets to look at all growth opportunities.

'They will have to run that much faster to perform the sort of sales growth of previous years - and the answer is to be big in non-foods.'

Figures from Verdict show that food sales are falling as a percentage of overall retail spending. Ten years ago, the family grocery budget accounted for 47% of the total amount spent in the High Street. Today, that has dropped to 41%, and by 2006 it will have fallen to 39%.

In response, Tesco and its American-owned rival, Asda, have built up significant non-food offerings in their hypermarkes. Tesco has had particular success exporting its large-store format to the international market, and Asda has reaped the benefits of joint sourcing initiatives with its parent company, Wal-Mart.

Over the past few years, both stores have built strong reputations in clothing, electrical goods, books and CDs, and they are having an impact on the sales of these items at traditional High Street retailers.

But two of the Big Four have so far lagged behind. While Sainsbury's Jeff clothing range has been well received and the store group operates a dozen large-format Savacentres, hypermarkets have not yet been seen as a major part of the group's recovery effort under chief executive Sir Peter Davis.

At smaller rival Safeway, a new concept hypermarket was opened in Plymstock, Devon, last month with a 50-50 mix of food and nonfood - a dramatic change of direction for a traditional grocery retailer.

The 55,000 sq ft store, which was a conversion from an existing 28,000 sq ft supermarket, is half the size of a Tesco hypermarket, but it has nevertheless been given a warm reception by customers and retail watchers.

City analysts have likened the format, which will act as a template for a further 15 stores before the end of the next trading year, to a 'department store'. New initiatives centre around 'the hub', a cafe-style seating area, with a range of counters offering a variety of international foods on one side and a Waterstone's-style book section, complete with leather sofas for browsers, on the other.

Elsewhere in the shop-within-ashop format are a health-and-beauty section featuring top-name brands usually found in department stores, a cookery shop, a bedroom and bathroom section and another selling electrical items such as TVs and DVD players.

Grant Henley, Safeway's head of formats and merchandising, said that while the group did not want to cut back on foods, there was increasing demand for a wider range of products. 'Customers have changed the way that they shop,' he said.

'They expect large stores to carry more than just food and they don't want to go to one store for their groceries and elsewhere for good quality electricals or books.'

Hyman said it was a trend that was likely to grow. 'Tesco's success in this area means it is no longer really seen as simply a food retailer,' he said. 'Yes, shoppers will still go there for food, but they are prepared to buy much more.'

Figures from Verdict show supermarkets have already had a dramatic impact on the health-and-beauty sector.

A decade ago, specialist stores claimed 60% of the market while supermarkets had 30%. Today, after years of pressure by supermarkets aggressively building their share of the market, they are at level pegging. And within five years, the supermarkets are forecast to account for 60% of market share.

Hyman said: 'It is easier for them because they already have customers in big numbers. If the Big Four supermarkets make an all-out assault on non-foods, it will be a real threat to the High Street.'