Why Supermarkets Are Dismayed Over Tax Rules — But Are Expanding Anyway

Bruised and battered by online rivals, the pandemic and soaring energy and labour costs — if they can find anyone to work in their stores — the UK’s grocery giants have been hammered by a wave of challenges that has floored some of Britain’s biggest high-street names.

A cost-of-living crisis is hampering sales. Asda’s latest Income Tracker estimated that 40% of UK households do not earn enough to cover their essential bills.

And while many grocers are continuing to open new stores at a steady clip, they are raising their voices against another hindrance to cashflow: business rates.

Tesco boss Ken Murphy, addressing an audience at Retail Week Live in London on 28 March, urged the UK government to freeze the business rates multiplier now, ahead of making full-scale reform to the system.

“The government needs to make sure retail bills are sustainable and incentivise investment in jobs and places across the country,” Murphy said. “To do this, the multiplier must remain frozen — at least until any decisions or long-term reforms are made.”

He also urged the government to speed up the business rates appeal process, which he said was impeding cashflow that could be invested into stores, jobs and lowering prices for consumers. 

“Three years for an appeals outcome is crazy,” he said. “The appeal system is holding up hundreds of millions in cashflow amongst the retailers who need it most and could invest that money in local community investments.”

Murphy said retailers like Tesco also provide key services such as cash dispensers, post offices and pharmacies, and he said the government should be supporting the industry and “not taxing the retailer that provides them more onerously than everyone else”.

Murphy’s is not a lone voice. Bosses from M&S, Sainsbury’s and Currys have also slammed the government’s business rates reform for being a far cry from what was promised and said the new rate of tax is “throttling local economies”.

The government unveiled a business rate shake-up last year, which is estimated to be set to save supermarkets £550M in tax over the next three years, according to analysis from Altus Group.

But retailers believe the changes, which include more frequent revaluations, are insufficient as physical stores are still left facing a high tax burden.

Marks & Spencer chief executive Stuart Machin told This Is Money that the levy “cannot continue” in its current state and said that while he welcomed the government freezing rates and ending downward transition last year, “it’s time they take decisive action to protect the retail industry, create jobs, bring customers back and support communities”.

“The system is outdated and punitive, and change is necessary to keep pace with a modern retail environment,” Currys chief executive Alex Baldock added.

The government has promised a full review of the tax system.

Volume sales across the grocery multiples fell by 3.9% in the four weeks to 25 March, with shoppers continuing to defect to the discounters, according to research by NIQ, which found that Aldi and Lidl’s combined growth continued to be above 20% over the period. 

Still, UK supermarkets experienced a 7% increase in shopping visits to stores, with a 13% uplift in in-store spend compared to the same time last year. 

“While inflation greatly influences shopping behaviour, there is an expectation that we will hit peak inflation in the next couple of months,” NIQ UK Head of Retailer and Business Insight Mike Watkins said.

With cost-of-living woes potentially easing up soon, grocery rivals are squaring up to battle on value and convenience, and as online growth has largely stalled or eroded, they are looking to expand their estates.

Asda — owned by the billionaire Issa brothers and TDR Capital, with 633 stores in the UK — has drafted in real estate adviser CBRE to work on its store expansion programme in the UK.

The retailer launched the Asda Express convenience brand in October, and the first two Asda Express stores opened before Christmas. It plans to open a further 300 stores by the end of 2026.

“Enhancing its store offering to include convenience stores on a national scale will further solidify Asda’s position as a leading supermarket,” CBRE UK Retail Director Adrian Hanley said.

Meanwhile, the Issa brothers are still working on a possible £12B merger of Asda with EG Group’s UK division, which would create a vast retail group comprising 581 supermarkets, 700 petrol forecourts and more than 100 convenience stores.

Morrisons is also targeting the convenience sector after falling behind in the race to open small-format stores. It returned to growth in its fiscal first quarter when it posted its first increase in sales since it was bought for £7B by private equity giant Clayton, Dubilier & Rice in 2021.

The supermarket chain reported a 3.4% increase in total sales to £4.7B for the 13 weeks to 29 January. Morrisons has opened its 500th Daily convenience store in Salford. The retailer acquired convenience business McColl’s in May 2022, and there are now 350 of the chain’s former stores operating as Morrisons Daily stores.

“We have targeted £700M of cost savings over the next three years,” Morrisons chief executive David Potts said. “This saving will help drive the performance of the business by enabling further investment in our loyalty programme, increasing the pace of McColl’s conversions and putting more hours into our stores.”

But Asda and Morrisons, like Tesco, Sainsbury’s, Coop and Waitrose, are under increasing threat from the soaring discounters. And Aldi chief executive Giles Hurley has said the German retailer’s “relentless” expansion of new stores will not pause.

In October 2018, Aldi set a target of having 1,200 UK stores by 2025, which equates to 60 per year. But Hurley has accused his rivals of a campaign of planning objections to delay those expansion plans, and the company is behind schedule and on course to open 40 locations this year, passing the 1,000-UK-store mark.

Although it is also making market share gains, German rival Lidl is slowing new store openings to 25 stores this year, instead focusing investment on new warehousing in Luton and extending Bridgend and Belvedere.

The impact of price-conscious consumers has been especially felt at Waitrose, which posted a sales drop of 3% in the year to 28 January. But it, too, is looking to grow. The upmarket retailer is investing in smaller stores and “increasing its presence in the convenience market” after seeing pandemic-driven shopping behaviours unwind.

Looking to step up its business in other ways, Waitrose is expanding its convenience formats, including rolling out food halls to 50 Dobbies Garden Centre branches by May.

Last year Waitrose also began supplying 13 convenience stores in Scotland and Jersey, and opened 11 new Waitrose shops at Shell forecourts, taking the total to 80. It plans to open more this financial year, and Executive Director James Bailey confirmed that there is also “an opportunity for the brand in expanding the number of little Waitrose stores”.