Waitrose: expanding its convenience offer

Waitrose has announced plans to open up to 300 new convenience stores and strengthen its ties with the health and beauty retailer Boots. The two retailers will trial selling each other's ranges, with Waitrose supplying food to Boots and Boots providing Waitrose with a health and wellbeing range. With the convenience market consolidating, the time is right for Waitrose to expand.

The grocer already operates two convenience stores, with outlets in Trinity Square, Nottingham and Clifton, Bristol, and plans to open two new stores in Crouch End, North London and Oxted, Surrey before the end of the year. However, Waitrose now sees the potential for up to 300 more stores to open and will trial a new, smaller format in 2010. Its current convenience stores are between 5,000 and 7,000 square feet, while the new trial stores will be between 2,000 and 4,000 square feet.

As well as extending its convenience store offer, Waitrose also plans to open nine more outlets in Welcome Break service stations. The strengthened relationship between Waitrose and Boots will see the retailers sell a selected range in each other's stores. In addition, 13 pharmacies in Waitrose stores will be rebranded as Boots, a strategy which will commence in November 2009.

The decision to expand its convenience offer now is a very sensible one for Waitrose. The market is consolidating quickly with Tesco and Sainsbury aggressively expanding and the symbol groups actively recruiting new members. With many vacant stores appearing on the high street, Waitrose should also be able to negotiate some good deals for prime locations as landlords look to fill empty units quickly. Moreover, if Waitrose had not looked to expand its offer now, it risked finding growth much harder to achieve later with fewer available vacancies and stronger competition. It will also be able to take advantage of the growing trends for smaller, more frequent purchases as shopper habits change and customers look to keep costs down. This expansion should also help it to establish greater exposure in the North of England, where it currently has a limited presence.

The tie-in with Boots will help to boost its personal care offer, while strengthening Boots pharmacies which, being located within a convenience store, will be able to operate longer hours than those on the high street. Waitrose will benefit from having enhanced health and beauty ranges, with Boots filling in the gaps in its existing offer, as well as pharmacies in its stores. Few of the major grocers have a robust pharmacy offer, so this will help to differentiate Waitrose from the other grocers' convenience formats. The two retailers also have similar brand values of quality and value, making the tie-up between the two mutually beneficial.

However, this tie-in with Boots does present a potential problem. While it will only supply Boots with a select food range, the potential for overlap exists. With its smaller city center stores likely to focus on food to go, its sales could be cannibalized by Boots stores with customers going there instead, especially Boots Advantage Card loyalty scheme participants. However, the ranges stocked in each other's stores are likely to be more complementary and not complete directly with each other.

This news is less welcoming for other retailers in the convenience store market, especially independent stores and symbol groups, which will have to deal with the challenge of another major grocer expanding in their market. Waitrose's upmarket credentials and more differentiated range architecture will hurt existing players, especially the symbol groups. While these retailers have worked hard to improve their ranges, especially at the premium end, they cannot compete with Waitrose, especially as it has improved its price and value credentials with the Waitrose Essentials range.

Indeed, the entry of Waitrose may see the consolidation of the market accelerate as independent retailers either join a symbol group to survive or are forced out of the market. Specialists, such as butchers and delicatessens, could also see their points of differentiation and customer bases erode. The key aspect of Waitrose's offer is that it provides high quality fresh food, putting it in direct competition with these specialists. The expansion of Waitrose puts these retailers under even greater pressure than before.

While it makes the conditions for the retailers in the sector challenging, another winner from this move will be the sector's customers, who will experience even higher store standards, product quality and price competiveness. Many symbol groups have made significant strides forward in response to Tesco and Sainsbury entering the market and Verdict expects similar strides with the arrival of Waitrose. Symbol groups will either improve their premium ranges even further or reduce their prices to better compete. Such high levels of competition can only be good for customers as each retailer strives to gain their custom.

Verdict believes that Waitrose's strategy is a very sensible one. Customers are increasingly carrying out smaller, top-up shops and the market is quickly consolidating. Such aggressive expansion plans are vital as rivals already have large store bases and are looking to expand quickly. Were it not strike while the iron's hot, establishing a competitive offer would be extremely challenging.