UK supermarkets: property ladder

Does £1.3bn matter? What about £3bn? When they are non-cash charges, they are easy to ignore. UK supermarket chain Wm Morrison wrote down its property assets by £1.3bn (or 15 per cent) last month. A write down on that scale in Tesco's numbers, due on Wednesday, would result in a £3bn charge says Deutsche Bank. As they are not cash charges, they are easy to dismiss as one-offs.

But that would be a mistake - the value of supermarket sites should play a big part in what the grocers do next. The three big listed chains (Tesco, Morrison and Sainsbury) are in a tight spot. Having added a vast amount of new space over the past couple of decades, they are losing market share to rivals such as discounters Lidl and Aldi. Larger stores are suffering more than most. Goldman Sachs expects sales at the bigger stores to fall 3 per cent per year between 2013 and 2020.

The obvious answer would be to shut some of them down. But - aside from some tweaking at the edges (Tesco is closing 43 out of over 3300 UK stores) - none of the big chains has a hefty store closure programme under way. There are plenty of reasons why. They do not want to lose customers to the competition, and with them lose buying power with suppliers. More importantly, most stores still generate cash even if their like for like sales numbers are slipping.

Assume that a supermarket site has cost £24m to buy and build, and delivers £3m of cash per year. The 13 per cent return is very nice. If the cash flow falls to £2m - a fairly drastic scenario - the 8 per cent return looks much less nice. But the rate of return on the initial cost to buy and build does not matter to the closure decision. What matters is whether the future cash flows from the store are worth more or less than what could be had from selling or converting it. The alternative use value, often residential, tends to fall a long way short. Even if the write downs continue, do not expect a wave of closures.

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