Unfortunately for supermarkets, things aren't that simple. Margins are notoriously small, competition is cut-throat and hiding cash from the taxman isn't as easy as stuffing money into your pockets. And unlike the humble market grocer, there's only so much the main supermarkets - Sainsbury’s (SBRY), Tesco (TSCO), Asda and Morrison (MRW) - can do to differentiate themselves from one another. They are, after all, selling the same products, at roughly the same prices, out of similarly soulless venues. On top of that, they're also being squeezed by low-end grocers such as Iceland and Aldi and upmarket supermarkets like Waitrose.
This goes some way to explaining why so many supermarkets have branched out from traditional grocery and now have their fingers in several different pies. All four have created their own clothing brands - Tu, F&F, George and Nutmeg. Morrison also owns Kiddicare, a baby and infant retailer acquired in 2011, as well as a wine business. It's even expanding its non-food offering online by teaming up with Lakeland. Sainsbury's and Asda have extensive ranges too for all sorts of things you could ever want for your house, car and garden.
And it's certainly not hard to see why supermarkets are so focused on merchandise. At Sainsbury's, for instance, non-food sales are growing at over twice the rate of food, with particularly strong growth in homeware and kitchen appliances. It's also likely that general merchandise sales come with much higher margins. Across the North Sea in Holland, Ahold (NE: AH), one of our recent buy tips, is already well diversified, with a chain of pharmacies and wine shops in its portfolio, although it too recently snapped up Bol.com, a non-food online retailer in the Netherlands with a 10 per cent share of the domestic market.
Tesco, meanwhile, is to open a London flagship store for its F&F clothing brand this autumn on the first floor of its Kensington superstore, adding to several F&F standalone shops in central Europe and the Middle East. But when it comes to branching out, Tesco has been considerably more adventurous than its peers, experimenting with its own standalone food brands and snapping up smaller businesses in a bid to improve trading in the UK following a profit warning 18 months ago - last March, Tesco acquired restaurant chain Giraffe and has big stakes in artisan coffee shop Harris & Hoole, movie and TV-streaming website Blinkbox and Islington's Euphorium bakery. What Tesco appears to be doing is not only diversifying its revenue stream, but buying stakes in smaller retailers to benefit from a growing consumer preference for 'local' independent shops. Indeed, it came as a shock to many a coffee lover when Tesco was exposed as Harris & Hoole's multinational backer.
This strategy of buying up small independents is an interesting one and arguably a very clever business move - one that dozens of multinationals are already engaged in. However, what's puzzling is that rather than leave the brands alone, Tesco has been incorporating the likes of Euphorium and Harris & Hoole into its mega stores - the supermarket's brand-new "shopping and leisure destination" in Watford has Giraffe, Harris & Hoole and Euphorium all under one roof. Surely, this only serves to devalue the businesses and removes the very reason why so many shoppers might have chosen to spend their money there, rather than in a supermarket. Chief executive Philip Clarke says Tesco "will back businesses in which we see an opportunity for their brands to grow with ours," but in some cases, it might be better if Tesco were to remain a 'silent' backer.
Moreover, this new-look Watford store features a general merchandise area, a community space for free events such as yoga, a boutique-style F&F, a nutrition centre and beauty bar. "More and more of our customers are shopping for leisure. They want to browse for clothes, eat a meal or grab a cup of coffee, as well as do their weekly shop," says UK MD Chris Bush. Actually, this seems exactly the type of thing shoppers don't want. True, consumers love malls, but these offer real variety, in contrast to the Watford centre, where Tesco has a monopoly. Furthermore, I'm not sure most people would consider their weekly grocery shop as a 'leisure' activity, or would ever want to for that matter. Here, I'm afraid, Tesco has got it wrong.
