Tesco finds discretion is better part of valour: Territorial conquests are over as the big retail stores surrender to reality. William Kay reports

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AS A U-turn it may not quite rank alongside Napoleon's retreat from Moscow. But in terms of job losses, the casualties could be horrendous. For the stores sector, it was a historic moment.

With a few fateful words last week Sir Ian MacLaurin, the man who claims to have saved Tesco from extinction, signalled that jobs would have to go - casualties of the retreat as his group turned its back on conquering new territories.

'There is a diminishing number of profitable prime superstore sites available to be developed,' he admitted. The underlying message was stronger than his turn of phrase: he was in effect suing for peace in Britain's long-running supermarket wars.

Instead of new territories, he will concentrate on turning Tesco into what one analyst dismissed as 'a chain of big convenience stores, like a string of blown-up 7-Elevens,' complete with flowers, pharmacy, dry-cleaning, post office and a cafe. Oh, and some food, too.

Sir Ian explained: 'We shall develop additional trading formats in the UK, such as our compact, smaller, market-town stores and high-street Metro stores, as well as Catteau, our recently acquired French business.

'We shall improve the returns from existing space through the introduction of new product ranges and new developments, such as pharmacies, and by means of an extensive refit programme.'

At the same time, more of the routine tasks of supermarkets are being taken over by computers. Just as this process has slashed employment levels in banks, so it will have a severe impact on retail staff from checkout to warehouse. Management consultants may soon recommend that J Sainsbury cuts its payroll. Others are bound to follow as the industry lowers its cost base.

To put Tesco's retrenchment in perspective, the group is cutting its store-opening programme from 2.4 million square feet last year to 1.6 million sq ft in 1996/97.

But this takes no account of closures, and disguises the change in mix from out-of-town behemoths to more modest in-town outlets.

The space race has been won by Sainsbury, in effect setting in stone the Sainsbury/Tesco/Safeway 1-2-3 pecking order. Sir Ian and Sir Alistair Grant, chairman of Safeway's parent, Argyll Group, have implicitly conceded that they will never overhaul their rival.

There are several reasons for the scaling-back of territorial ambitions: saturation of the market by land-gobbling superstores of up to 100,000 sq ft; a recession-honed generation of value-conscious consumers; an invasion of the bottom end of the market by the discount chains; and tougher attitudes by local authorities towards planning permission.

Among the smaller fry, Gateway Group hopes to revive its ailing fortunes by converting its main stores to a stripped-down version of the upmarket Somerfield fascia it has been running for four years.

Gateway's chief executive, David Simons, said: 'Our customers told us they were slightly frightened of the old Somerfield design, and some thought they were paying for it in the prices.'

The era of non-stop expansion is over, as the upstart Archie Norman of Asda Group told anyone who would listen as long ago as last July. He was pooh-poohed for his pains, but since then some of the industry's elders have quietly fallen into line.

It is a far cry from the heady days of less than two years ago, when Sir Ian boasted: 'I don't think you'll ever get saturation.'

This week we can expect David Sainsbury to throw his two penn'orth into a debate that is as much about ego as economics. He will point to the vast stretches of the United Kingdom not yet blessed with a branch of the chain his family founded in 1869.

Such evangelism will cut little ice with Tesco, which has a handful of outlets in Scotland and other remote areas but has seemingly lost its stomach for the fight.

'I think it's a turning point,' said Bill Currie, food retailing analyst at Barclays de Zoete Wedd. 'After a decade of chasing Sainsbury, Tesco has given up.'

Mr Currie predicts a growing division between the supermarket groups that are likely to rein back, like Tesco and Argyll Group, and those he expects to continue their geographical expansion, such as Sainsbury and Wm Morrison Supermarkets.

'Tesco will be yielding store expansion to Sainsbury, who will be able to acquire more sites and suffer less competitive attrition,' Mr Currie said.

As UK demand for food is near-static, the only ways retailers can grow are to open more stores and/or persuade each customer to spend more.

Many shoppers fondly imagine that supermarkets can be trusted to sell them their weekly grocery basket at the keenest prices. But, after initial sneers by the established supermarkets died away, the price fight has been comprehensively won by discounters such as Aldi, Netto and Kwik Save.

'Tesco has had a lot of pain by trying to follow us,' claimed Derek Pretty, Kwik Save's finance director, 'but our operating costs are about half theirs.'

Discounters' cost-cutting approach means lower stocks and no frills. Significantly, Kwik Save has been opening in the high street - where Tesco is now heading again.

The big chains began to panic last year when the US-based Costco warehouse chain revealed that it was coming to Britain. They tried to block the invasion in the High Court, arguing that as a retail operation, it must be bound by the same planning restrictions.

Costco won that round, counter-claiming that it was a wholesaler. After the hype, however, its early trading has been mixed and 130 staff were laid off after Christmas. But it has already inspired a me-too project by the locally-grown Nurdin & Peacock, which looks set to be another thorn in the side of the supermarkets.

'The competition has heated up in the past year,' admitted David Reid, Tesco's finance director, 'as the superstores have reacted to the discounters in resetting benchmarks for day-to-day staple products. That has had some effect on margins. Our first priority must be to maximise returns on our stores; the overall square footage is going to stabilise.'

The mainstream food retailers hope to keep the discount merchants at bay by offering low-priced versions of basic lines such as butter, yoghurt and baked beans. Asda, Argyll and Gateway have their own discount chains, and even the mighty Sainsbury is dipping tentatively into the 'pile it high' game by piloting a format called Bulksava in east London.

Beyond that, however, the beleaguered supermarket groups will try to compete with the price-cutters by offering better service and wider variety - praying the while that enough shoppers will prefer cosseting to price cuts. But, in case they waver, they are about to be wooed with an array of so- called loyalty schemes to encourage them to keep coming back (see below).

During the spend-crazy 1980s, the supermarkets found it easy to tempt people through the door with heavily promoted discounts - and then lure them into splashing out on champagne and smoked salmon.

That tactic died with the recession. Now, Tesco and others are trying to maximise the turnover at each of their outlets by using computerised technology to cut warehouse and back-office space. That can then be released to display the widening range of non-food items, from clothing to video games.

Tesco is confident that Sainsbury's expansion will be halted by the same sums that led its board to raise the white flag last Tuesday. After all, their building costs are virtually the same and they bid similar sums for sites.

But this reasoning reckons without the fact that Sainsbury can now plan without worrying about whether one of its most vigorous rivals will home in on a new territory.

However, the consensus view of the sector's City analysts is that UK supermarkets have run out of growth. Indeed, by drawing attention to a 'progressive' dividend policy, Tesco made a serious bid to have its shares rerated as an income stock along with electricity and water shares.

While that may send the late Sir John Cohen, Tesco's street-trading founder, spinning in his bier, there is little doubt the current squeeze will make the supermarket groups look more closely at the prospects for expansion overseas.

The upshot could be more UK supermarkets following Sainsbury into the US - the world's biggest consumer of food, but also home of the toughest competition.

(Photographs omitted)