Tesco finds its mega stores are a waste of space and Morrisons makes a late bid to get online as grocers adapt to new habits

There is trouble afoot in supermarket land. The UK’s £160bn a year grocery business has run on a fairly simple model since the early 1990s – with one of the key routes to success being the ability to open more and bigger shops.

It was dubbed the space race and at times the mission threatened to carpet the country with superstores, extending the shops that were already open and shoving in mezzanine floors to display endless racks of fleece blankets, frying pans and fashion.

But, quite suddenly, it has dawned on the major players that size is not necessarily what matters, because shoppers are changing their habits fast. They are shopping in smaller outlets, more often, and moving online at a dramatic rate. They are also less loyal – food shoppers now use on average four different shops a month, and shoppers under 30 tend to use six.

Official data shows online retail sales reached more than £50bn last year, out of total UK retail sales of £350bn. That’s already 14% of total spending. According to retail analyst Philip Dorgan at Panmure, more than 30% of retail sales will eventually be transacted online – 20% of food sales and 40% of non-food.

Sales through mobile devices, say online retail specialists IMRG, were up more than 300% last year, but the value of each online “basket” declined – suggesting consumers are going online for smaller, more regular purchases.

The changes in shopping habits will mean a seismic shift in the world of retail and changes in behaviour that Dorgan reckons will have “cataclysmic implications”. In the last week, announcements by two of the big four supermarkets can be linked directly to the changes that are coming.

Morrison revealed it is in talks with online grocer Ocado to (belatedly) find a way to offer online grocery shopping, while Tesco announced it is buying Giraffe, a rather upmarket restaurant chain selling mojitos alongside child-sized portions of grilled veggie focaccia, aimed at middle-class families.

Morrisons is well behind the online curve. Its chief executive Dalton Philips has spent three years thinking about moving online, although he describes his tardiness as offering the benefits of “last mover advantage”. He bought a stake in a New York online grocer to see how to make the internet work, acquired the Kiddicare web retailer for much the same reason and had the benefit of an Ocado founder, Nigel Robertson, on his board as a non-executive. Clearly, none of them provided enough answers because Philips is now talking to Ocado about licensing its technology and offering home deliveries sometime next year, hopefully, maybe.

Tesco is battling to prevent its market share being further eroded: in February, it slipped to 29.7% – its lowest level for seven years. Chief executive Phil Clark is fighting back with price promotions, which always provoke a reaction from rivals not unlike the final scene in Reservoir Dogs. But shoppers are still defecting to upmarket Waitrose and hard discounters like Aldi and Lidl. What do they have in common? Smaller stores, which require less time to do the weekly shop, and a clear price position.

Tesco is the biggest online grocer, but it has too many big stores. Clark has conceded there are unlikely to be many more giant out-of-town superstores but, in fact, he is going to have problems finding a use for the space he has. Hence the acquisition of Giraffe. The restaurants are designed to pull families to the stores, but they are unlikely to be sited inside the shops. Instead, expect Tesco to build a wall in some out-of-town mega-shops, with a separate entrance for a Giraffe restaurant.

The grocer has also acquired a 49% stake in upmarket coffee chain Harris+Hoole and a share in artisan bakery business Euphorium. It is all a far cry from bogofs and horseburgers.

As Dorgan explains: “Tesco needs to invest in areas that its shoppers will want to spend time doing when they spend a lot less time shopping. Eating out is clearly one.”

JP Morgan’s big fish gets off the hook

Five years ago this week, Jamie Dimon was an all-American hero. The boss of JP Morgan had stepped in to rescue Bear Stearns, averting the type of crisis that was to befall the world when Lehman Brothers collapsed six months later, unleashing chaos in the financial markets.

This week Dimon was anything but a hero. His bank was lambasted by the very effective Senate permanent sub-committee on investigations for the “London Whale” trading incident, which cost the bank $6.2bn in losses and an unmeasurable amount of reputational damage. Carl Levin, the committee chairman and a man accustomed to handing out maulings, said: “We found a trading operation that piled on risk, ignored limits on risk-taking, hid losses, dodged oversight and misinformed the public.”

The committee concluded that Dimon already knew about the London Whale (the nickname of the trader involved) when he dismissed the incident as a “tempest in a teapot” in April, just months before the bank was forced to admit to massive losses.

Dimon – he still has his job – did not give evidence to the Senate committee last week. Instead Ina Drew, JP