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In times of economic uncertainty, investors are increasingly searching for lower risk investments and secure income. Occupier markets have moved through turbulent times during the recent global downturn with many not surviving the storm. The retail market saw a number of retailers falling into administration and a big increase in CVA agreements much to the detriment of landlords. One of the asset classes which we believe has weathered the storm and proven itself as a low risk, less volatile asset class are the nation’s assortment of supermarkets.

Over the last five years we have seen excellent sales performance from the food store sector with sales achieving above four percent growth per annum. Such growth highlights the defensive nature of supermarkets with the basic concept that consumers still always need to purchase food despite an economic slow down.

Growth in expenditure on food and grocery items slowed during the course of 2010 although remaining positive. This is a result of difficult past year comparables to beat but also lower inflation growth within the sector in 2010 versus 2009.  Verdict Research forecast subdued sales growth over the next five years for food and grocery but this is due to more modest inflation at 2.3 percent for the sector versus 3.2 percent historically. We do not believe this is a cause for concern with the main UK operators following healthy business models, reporting constant positive growth and issuing aggressive plans for further expansion.

Continued growth
Despite inflation, Supermarkets have also captured good growth over the past few years by gaining market share. Development of their own private labels to increase value and premium offers has been a huge success, catering for all and allowing them to capture a range of consumer audiences. Premium food offers have captured spend away from restaurants and pubs with frugal consumers treating themselves at home rather then out for the evening.

Supermarkets have also been successful in gaining a greater share of shoppers in non-food sectors. Non-food will continue to be a driver of growth for Tesco, Sainsbury’s and Asda as they invest more capital into these areas, especially in their large out of town formats which ultimately helps boost growth and drive footfall.

Further non-food growth opportunities are believed to include service channels, with supermarkets looking to offer current accounts and mortgages in store. This would have an impact on the high street banking sector creating further footfall driver for supermarkets. Verdict Research estimate that by 2014, supermarkets having a presence in more aspects of consumers lives and an interest beyond retail, will see their share of consumer spend reach to over 17 percent, up from 14.5 percent in 2000.

Supermarkets have seen strong growth over the last five years and although growth moving forward will be more subdued given weaker inflation forecast for the sector, the asset class will remain successful in gaining footfall and maintaining a large proportion of retail spend. Supermarkets are well placed to be able to maintain sales, irrespective of the economic environment, and continually adapt their range and offers to suit consumer preferences.

Gang of four
The UK supermarket sector is dominated by the Big four which includes Tesco, Asda, Sainsbury and Morrisons. Tesco is the third largest food retailer in the world by revenue and the UK’s largest retailer by sales with over 30 percent of the market share in the UK’s grocery market.

IPD’s IRIS system highlights Negligible to Low risk rankings for the Big UK supermarkets.  This is based on Dunn and Bradstreet analysis. Investors within the UK supermarket sector benefit from a low risk income profile, which is a hugely sought after and attractive quality, given the recent turmoil within property occupier markets.

Strict UK planning restrictions create difficulties for supermarkets to expand easily and therefore supply is tight putting upward pressure on rental tones if a unit was to become available.  The growing success of the sector has resulted in strong rental growth performance which has kept apace with RPI. The correlation between RPI and supermarket rents is much more closely linked than any other sector in the industry.

Moving forward the desire for new space continues, UK supermarkets have aggressive plans but face narrowing opportunities for new stores out of town. Smaller convenient formats are being developed plus supermarkets are seeking extensions to their existing stores. With high demand and low levels of supply, pressure on rental growth will remain and we expect stronger rental growth prospects for this sector versus all property.

The supermarket sector has remained relatively liquid over the last few years resulting in a more stable yield profile. Backed by robust yields and high levels of rental growth, UK Supermarkets have out performed all property and all retail over the last 10 years to end 2010.

The strength of the occupier market for UK supermarkets has lead to lower volatility in medium and long term total returns. Over a three year period, supermarket total returns have recovered materially better from the economic downturn in 2008. This positive volatility has led to improved performance for almost all shareholders.

The continued expansion of UK supermarkets and their importance within the UK’s retail landscape alongside a track record of total return outperformance and lower volatility should make them an attractive asset class going forward for investors.

Angela Keane is an associate research director at Henderson Global Investors