Why convenience stores are still worth sparring over

Corner shops were based on three things: confectionery, tobacco and newspapers. Sales of two of those haven’t been going so well for years, and the government’s anti-obesity drive has the third in its sights.

No surprises then that McColl’s, a ragbag of convenience sites from old-school newsagents to mini-Morrisons, went into administration on Monday. But the triumph of Wm Morrison over EG Group, the vehicle of the Issa brothers who own Asda, in a tussle over an unglamorous retail asset shows the sector is not yet yesterday’s news.

McColl’s had plenty of problems. Traditional newsagents are a declining business. The future lies in a tailored selection of alcohol, fresh food and other specialist services such as Post Offices. McColl’s had too many old-style sites. To redress the balance it bought 298 new stores from the Co-op in 2016 for £117mn. The deal did not work out well. It lumbered McColl’s with a debt pile that has proved its undoing.

More broadly, McColl’s had an image issue. As Steve Dresser of Grocery Insight puts it: “What did McColl’s stand for? Nothing in reality, as a brand name.” The Co-op deal stuck McColl’s with stores that were not trading well under that well-understood identity. They did not trade better under the McColl’s name. That McColl’s was midway through a strategy that rolled out Morrisons’ branding in place of its own in the form of “Morrisons Daily” stores shows how weakly it resonated with consumers. Though 16,000 jobs have been saved by the sale, a decent chunk of the McColl’s portfolio seems destined to be run down over time.

Ultimately the debt, supply disruptions and trouble attracting staff in a tight labour market sent McColl’s into a death spiral. But the economics for the wider sector are not nearly as bleak.

Convenience stores had a goodish pandemic. More generally, they’ve had a good decade thanks to the decline of the weekly shop and the limited inroads made by rapid delivery services. The sector has been growing ahead of the grocery market. The total value of sales in 2012 was roughly £33.9bn, according to the Association of Convenience Stores. By 2021, it was £43.2bn. The Institute of Grocery Distribution estimated last year that the sector would by 2026 add another £5.5bn in sales.

Unlike Tesco and Sainsbury’s, neither Morrisons nor Asda has successfully expanded into the area. Morrisons’ earlier attempt in 2013, when it tried to turn Blockbusters into convenience outlets, was a disaster. After two years it called time on “Morrisons M”, taking a £30mn loss.

This time could both be easier and provide useful growth a year after Morrisons’ own debt-laden buyout. These are stores with established footfall, not odd video rental sites. Morrisons already has a relationship with McColl’s, not just as a brand but as wholesaler too. Switching from McColl’s to Morrisons Daily has so far resulted in a 20 per cent-plus overnight sales lift, though that gap may narrow as conversions stretch further down the store list.

There would have been costs to letting McColl’s go, though, not least brand damage. “If McColl’s had gone bust or been bought by someone else, Morrisons’ supply deal would have been screwed up and hundreds of the Morrisons Daily stores would have had to be de-Morrisonised,” says retail consultant Graham Soult. Acquiring McColl’s avoids that risk and keeps the £1bn wholesale deal in place.

For EG, the long-run attraction might have been to build a convenience portfolio under the Asda label. With an empire built on debt and relentlessly acquisitive, the Issas have shown themselves willing to bid for just about anything. Annoying a rival may have been an added bonus.

Still, big chains have sometimes struggled to make the maths — and margins — of the sector work. These are local stores that need to cater to very peculiarly local tastes. It can be hard for big national operators to tailor them to ensure they are sufficiently profitable. Mini-supermarket style stores charging premium prices to compensate for city centre rents will probably find themselves vulnerable to a consumer spending squeeze when there’s an Aldi or Lidl down the road.

Unlike flashy tobacco packets and weekday broadsheets, convenience stores will survive. Morrisons has a job on its hands to make the old McColl’s thrive.

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