Retail

The convenience retail sector is growing at a rate of 5% a year and is worth £37.7bn to the UK economy.

The local shop is a long standing feature of UK communities and it is constantly evolving and changing.  The modern local shop has developed over the last 20 years from small corner shops to the current all encompassing convenience store format and petrol stations now account for approximately 11% of convenience sales.   

Consumers now have high expectations and both the corporate and independent sectors have responded, offering a wide range of products trading from modern retail units.  The large multiples are actively acquiring sites to capitalise on changeable consumer behaviour. London has the greatest demand for sites and the property market commands higher rents – sometimes double the market rate in the regions. 

The multiples have begun to focus more on the profitable areas of their portfolios and look at ways in which they can reduce their overall costs. There has been a strong resurgence amongst independents acquiring lower tier assets, and this has increased the number of unaffiliated independent stores by 3.4% in the last year. The market has also recently witnessed private equity participation which we expect to increase.

Over recent years the petrol station market has been dominated by the reduction in the overall site numbers, reducing from 10,351 in 2004 to 8,490 in 2015 – a reduction of 31% since 2001.  There has also been a shift in market dominance from the oil companies to the supermarkets, which are responsible for opening around 80% of all new to industry sites. Whilst supermarkets own around 17% of sites they dispense around 44% of total fuel volume. 

The National Living Wage, potential change to Sunday trading law and business rate rises could all impact the convenience retail sector in the coming year. According to the Association of Convenience Stores (ACS), if the current Sunday trading laws are abolished in favour of allowing stores larger than 3,000 sq ft to trade for more than 6 hours on Sunday, the convenience sector could lose an estimated £870m in value to the economy.

The cost of the National Living Wage, including employment allowance and auto enrolment could cost the convenience sector a total of £166m. The implication of these reforms is likely to reduce the level of investment in the sector and could also put approximately 80,000 jobs at risk (ACS).  However owner operators can be more flexible and are likely to be affected less.

2016 is likely to see the convenience property market grow concurrently with real estate generally and we expect a busy year with more M&A activity possibly through private equity participation.  Trading fundamentals driven by consumer behaviour will also enable continued demand for good convenience locations. 

Christie & Co has dedicated specialists in forecourt and convenience retail. If you're thinking about your next retail business investment and require specific performance data to uncover opportunities, please contact us.

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Trends in the regions

The retail sector is diverse, covering a wide range of businesses that includes retail units, newsagents, off-licences and convenience stores. It also encompasses specialised shops such as post offices, fish and chip shops and petrol stations, each of which present different business and lifestyle opportunities in an exciting and dynamic market.

 
The convenience retail and forecourt sectors are currently facing numerous challenges with regulatory change. These include the National Living Wage reform and Sunday trading powers being given to local authorities. However, this market performed well during the recession and we expect it to be resilient throughout these regulatory changes which were announced in 2015.  Inflation also remained low during 2015 which benefited consumers UK wide. Couple this with increased disposable income from a rise in wages, consumers in this market will benefit with more purchasing power.  We expect to see evolving shopper habits which the convenience retail market should adapt to in order to fulfil the needs of the new generation of shoppers. It is now also more important than ever that forecourt operators have a high-quality convenience offering as more shoppers desire a one-stop shop. Fuel margins remained robust for fuel retailers in 2015 and property demand is outstripping supply.
 

London

There is huge focus by the large multiples on London where they have ambitious acquisition plans.  New to industry buyers often target the Capital but gaining access to funding is key with a preference by lenders to back established players or asset backed deals.  The recent McColls divestment programme shows us there is demand at every level despite a strong rental market across Central London.  Ambitious multiple operators are paying health premiums for prime businesses.   Freehold opportunities are rare and when sold fetch significant prices.
 

Midlands & Anglia

The East and West Midlands plus East Anglia markets are also in a healthy state. A rise in the quantity of transactions started in early 2013 and has continued since.  Convenience stores and post offices achieving high levels of weekly sales (and PO salary) are highly prized.  High turnover convenience stores are the most sought after, with a large interest in vacant units and neglected properties where a convenience store could be introduced. We have also seen a rise in demand for freehold rural opportunities where there is little competition coupled with higher margins as well as lifestyle businesses.
 

North

Demand is outstripping supply in the North.  Clients are churning their portfolios (selling smaller stores to buy / develop larger ones), independent operators are fighting multiples for space in the best locations, many first time buyers are entering the market and multiple operators are aggressively trying to locate and acquire businesses which can add long-term value to their estate. The number of freehold and leasehold sales has been fairly equal in the last 18 months, with prices for both rising over the same period. Petrol filling stations with a good convenience offering, or those which have the potential to add a good convenience offering are in high demand. Standalone, high turnover convenience stores which come to market attract large interest with many offers being received on them.
 

South

Freehold businesses are still attracting the majority of interest from buyers and to date there has not been a major impact from the Post Office Network Transformation on the sector in this region. We continually experience first time buyers looking for businesses to acquire, however, gaining access to funding is still key in the South.
 

South West

The market in the South West is improving with freehold prices on the up and bank lending easing. This results in more competitive rates for both existing operators and new entrants to the market. Sites with development potential top the list of the most sought after businesses, closely followed by those with an unopposed location.
 

Scotland

The market in Scotland has improved significantly over the past two years. Petrol filling station sales have been dominated by oil company disposals with Shell and BP in particular undertaking such divestments. There is strong demand from large well known multiples and a number of smaller regional independent groups looking to expand their portfolios. There has been several successful acquisitions undertaken this year for growing regional multiples. Over the past 7 years the market was dominated by experienced and local buyers, however, first time buyers and cross-border buyers are looking for opportunities in Scotland’s rural network as this begins to grow once again.