Supermarkets sense that size is no longer key to becoming master of the universe

(Observer (UK) Via Acquire Media NewsEdge) There is trouble afoot in supermarket land. The UK's pounds 160bn a year grocery business has run on a fairly simple model since the early 1990s - with one of the key routes to success being the ability to open more and bigger shops.

It was dubbed the space race and at times the mission threatened to carpet the country with superstores, extending the shops that were already open and shoving in mezzanine floors to display endless racks of fleece blankets, frying pans and fashion.

But, quite suddenly, it has dawned on the major players that size is not necessarily what matters, because shoppers are changing their habits fast. They are shopping in smaller outlets, more often, and moving online at a dramatic rate. They are also less loyal - food shoppers now use on average four different shops a month, and shoppers under 30 tend to use six.

Official data shows online retail sales reached more than pounds 50bn last year, out of total UK retail sales of pounds 350bn. That's already 14% of total spending. According to retail analyst Philip Dorgan at Panmure, more than 30% of retail sales will eventually be transacted online - 20% of food sales and 40% of non-food.

Sales through mobile devices, say online retail specialists IMRG, were up more than 300% last year, but the value of each online "basket" declined - suggesting consumers are going online for smaller, more regular purchases.

The changes in shopping habits will mean a seismic shift in the world of retail and changes in behaviour that Dorgan reckons will have "cataclysmic implications". In the last week, announcements by two of the big four supermarkets can be linked directly to the changes that are coming.

Morrison revealed it is in talks with online grocer Ocado to (belatedly) find a way to offer online grocery shopping, while Tesco announced it is buying Giraffe, a rather upmarket restaurant chain selling mojitos alongside child-sized portions of grilled veggie focaccia, aimed at middle-class families.

Morrisons is well behind the online curve. Its chief executive Dalton Philips has spent three years thinking about moving online. He bought a stake in a New York online grocer to see how to make the internet work, acquired the Kiddicare web retailer for much the same reason and had the benefit of an Ocado founder, Nigel Robertson, on his board as a non-executive. Clearly, none of them provided enough answers because Philips is now talking to Ocado about licensing its technology and offering home deliveries sometime next year, hopefully, maybe.

Tesco is battling to prevent its market share being further eroded: in February, it slipped to 29.7% - its lowest level for seven years. Chief executive Phil Clark is fighting back with price promotions, which always provoke a reaction from rivals not unlike the final scene in Reservoir Dogs. But shoppers are still defecting to upmarket Waitrose and hard discounters like Aldi and Lidl. What do they have in common Smaller stores, which require less time to do the weekly shop, and a clear price position.

Tesco is the biggest online grocer, but it has too many big stores. Clark has conceded there are unlikely to be many more giant out-of-town superstores but, in fact, he is going to have problems finding a use for the space he has. Hence the acquisition of Giraffe. The restaurants are designed to pull families to the stores, but they are unlikely to be sited inside the shops. Instead, expect Tesco to build a wall in some out-of-town mega-shops, with a separate entrance for a Giraffe restaurant.

The grocer has also acquired a 49% stake in upmarket coffee chain Harris+Hoole and a share in artisan bakery business Euphorium. It is all a far cry from bogofs and horseburgers.

As Dorgan explains: "Tesco needs to invest in areas that its shoppers will want to spend time doing when they spend a lot less time shopping. Eating out is clearly one." (c) 2013 Guardian Newspapers Limited.

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