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August 2, 2017updated 03 Nov 2017 5:21pm

B&M and Heron: the discount-convenience hybrid

B&M have continued this week’s trend of acquiring convenience stores (after Morrisons and McColl’s yesterday) with their acquisition of Heron for £152m.

By GlobalData Retail

B&M have continued this week’s trend of acquiring convenience stores (after Morrisons and McColl’s yesterday) with their acquisition of Heron for £152m. The move was unexpected, but mostly because Heron isn’t a common household name. However, with 251 convenience stores in the North of England and £274.4m of sales, it offers the opportunity for B&M to roll out a convenience offering on a relatively large scale very quickly.

Once the rationale is considered further, the move starts to make more strategic sense. Discount retailing has experienced double digit growth over the past five years, with 2016 seeing c12% growth. The traditional medium-sized discount store model hasn’t really evolved given the supply chain limitations and location constraints that are inherent in a lean, low-margin model. Aldi and Lidl have spoken about convenience being an interesting area of UK food retail, and they have been successful with c-stores in some other European countries, but we are yet to see more than a few Aldi or Lidl convenience stores in the UK.

If B&M start out with the idea that the Heron stores are going to be little discounters, then a supply chain, delivery system, and range can be designed with that in mind, rather than having to be adapted from an already existing discount food system. Things as simple as the fact that many of the pallets that Aldi and Lidl keep their stock on in-store are too large to be manoeuvred around small shops in urban areas can be rectified without disrupting an entire system. Once the idea of a purely convenience discount retailer is thought through, it’s actually pretty smart. The deal combines discount and convenience, two of the highest growth areas in the sector into a proposition that we know the consumer wants.

Acquiring more stores in the geography where B&M is most present comes as a surprise because expansion further south would capture market share without the risk of cannibalisation. However, with B&M’s 537 stores planned to increase to a maximum of 950 and 10 a year for Heron, it will become a presence all over the UK.  Additionally, considering B&M’s success in the North of England why not gain as much regional market share as possible. With geographical expansion in mind, much of the South East’s lack of discounter uptake has been due to location – convenience stores can be placed almost anywhere, and rent is cheaper. A discount convenience model could well be a way to break into the discounter-hostile South.

The acquisition complicates the rumour that ASDA and B&M could become an item. Either B&M have its own strategy which doesn’t include ASDA, or maybe ASDA is vying to get into the convenience game via B&M. Food retail M&A hasn’t ceased to amaze so far, so the possibilities are endless.

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