Sainsbury's chief Justin King: scope for taking market share in convenience store segment

Asda's purchase of Netto in May this year was a significant change for the supermarket retailer as it will now have a presence on UK high streets. However, the supermarket retailer is still expected to struggle to catch up with its major rivals, which have made huge inroads into the convenience store market, according to City analysts.

Sainsbury's and Tesco, two British supermarket heavyweights, have been opening smaller format and convenience stores there over the past 10 years to tap the trend for more local shopping. And both intend to continue. Over the next 12 months, Sainsbury's plans to open another 100 'Local' shops to add to its network of more than 300 shops. The new shops will include new retail developments as well as vacant units.

Sainsbury's recently reported its annual preliminary results and its chief executive, Justin King, said that the four major grocery chains – Tesco, Sainsbury's, Asda and Morrisons – made up under 15% of the convenience store market. This gives them huge scope for taking market share in the sector.

Tesco also said it was targeting the smaller shop sector and it believed there was potential for another 1,000 Tesco Express shops. Tesco has a network of 2,482 shops and just 455 of those are superstores. It has over 1,100 Tesco Express and 181 Metro shops, both of which are local convenience stores.

The smaller formats have been a key growth area for Tesco and Sainsbury's over the past several years as the trends in British grocery shopping have changed dramatically. There has been a significant swing away from huge, out-of-town supermarkets and towards more local shopping and Tesco and Sainsbury's have responded to that.

Customers are using local shops more frequently to top up their shopping with fresh produce or "food for now". This means that high street or local presence is becoming much more important for food retailers and the multiples increasing their presence in this market is a clear indication of this. In 2009 multiples had 4,338 convenience stores and this increased to 4,751 in 2010, according to the international food and grocery expert IGD.

As a result of this the convenience store market is now outpacing the growth of the UK general grocery market. IGD and William Reed Business Media found that the UK convenience market was worth stg£30.9bn (€37bn) in June 2010 and is forecasting it will reach stg£41.3bn by 2015.

Asda, which does not have a presence in the convenience store market, has been losing market share to its rivals. According to grocery sector data from Kantar Worldpanel, Asda's market share fell from 16.9% to 16.8% over the 12 weeks to 16 May. At the same time, Sainsbury's increased its market share to 16.3%. In May, Asda, which remains the second-largest retailer in the UK, announced its first fall in sales since 2006. The company admitted the 0.3% fall in like-for-like sales was disappointing.

Although the stg£778m (€930m) Netto acquisition has changed Asda from a superstore operator into a chain more like Sainsbury's or Tesco, it still has almost 300 shops in its 374-strong network that are over 4,600 square feet. Both Tesco and Sainsbury's moved into the convenience store market early – Tesco bought 1,200 T&S Stores in 2002 and Sainsbury's bought 114 Jackson premises in 2004.

Netto is the third largest "hard discount" operator in the UK, behind Lidl and Aldi. Its shops average only 750 square metres. However, its 193 shops are considered to be in locations that have lower footfall and it is not on as many traditional British high streets as Sainsbury's or Tesco.

In April, Asda's part-time chairman, Andy Bond, outlined a five-year strategy which included plans to surpass Tesco and become Britain's biggest non-food retailer. In a change of strategy he announced plans to open 100 small retailers and expand its non-food Asda Living chain. Until then the retailer had only opened superstores of up to 8,000 sq metres as they are more profitable.

This change, as well as the fact that Asda is owned by global retailer Wal-Mart, meant that as soon as the Netto acquisition was announced analysts were speculating that Asda might be ready to buy additional high street market share. It may even buy a presence in the home and fashion sectors. There is already speculation of a possible bid for Argos or Homebase, both of which have a significant local presence. However, a move into Ireland is considered less likely.

Although Sainsbury's was interested in expanding into the Republic by acquiring Superquinn, such a move is now considered unlikely because of the economic environment. Tesco, though, will continue to expand here.