With UK online grocery sales by value forecast to rise almost 124 per cent to £14.6bn over the next five years, the migration of largely non-food items, such as electricals, from physical space on supermarket shelves to virtual space on internet browsers presents the nation's largest grocers with surplus space in their biggest stores which is not terribly productive. Charlie Mayfield, chairman of John Lewis and upmarket grocer Waitrose, cast doubt on the future of the hypermarket back in 2012 arguing:
"Over the last 30 years it was convenient for customers and profitable for retailers to put non-food alongside food in [out-of-town] space that was cheap compared with other space. But with infinite choice on the internet and new fulfilment practices this changes the fundamental commercial rationale for hypermarket developments".
In response to changing consumer demands, one trend which has proved increasingly attractive and has gained particular traction over the last few years, is to bring in brands from outside the supermarket sector to use up surplus space and make the giant sheds more appealing to their customers:
- In 2013 Tesco unveiled its take on the "supermarket of the future" in Watford with a new store which included a Giraffe restaurant, a Harris + Hoole coffee shop, a Euphorium bakery and a stand-alone F&F clothing section and more recently launched an NY-style diner, Fred's Food Construction, at their store in Osterley, west London;
- J Sainsbury has more than 270 pharmacies in its stores, and about 10 private dental practices and around 40 doctors’ surgeries located either in stores or on its land; and
- Asda has put Disney concessions into four of its stores and has a host of mobile phone concessions in its stores.
From a legal real estate perspective the three main considerations facing any concession grant will be:
- Whether the lease permits the grant of a concession/licence - Commonly retail leases will expressly permit the grant of concessions within the demised premises without landlord's consent provided that the landlord is notified of such grant and that no landlord/tenant relationship is created as a result of any such concessionaire. Where a lease does not contain the required flexibility, a tenant may need to negotiate a variation of the lease terms.
- To ensure that the licence/concession agreement does not inadvertently create a landlord and tenant relationship. The concession grantor will need to ensure compliance with their lease terms as well as protect itself against a concessionaire potentially acquiring statutory rights of protection as a result of their occupation of demised premises. Careful consideration should be given not to grant a concessionaire "exclusive possession" of a particular area which is likely to mean that concessions are re-located from time to time which is obviously far easier done in a 80,000 sq. ft. hypermarket than where dealing with concessions in far smaller stores.
- To ensure that the "permitted use" provided under the terms of the lease satisfies the intended use of the concessionaire. If a shop unit has A1 use, planning consent would be needed to use part of it for an A3 restaurant and landlord’s consent for the change of use might be required with the obvious time and expense implications.
It seems inevitable that the multi store-in-store approach is to continue providing opportunity for smaller business operators especially those capable of aligning themselves with a portfolio owner, a proven franchised business operator for example, to secure a presence in giant sheds with significant ready-made foot-falls.
To discuss further or for any specific advice relating to the above, please contact Oliver Goodwin.