Food inflation remains above the long-term average, yet the UK’s leading grocers continue to see positive performance driving investor competition for well-located supermarket assets
UK consumer trends
Food inflation is steadily growing and above the long-term average; however, recent elevated prices are a result of domestic influences rather than the global and systemic ramifications seen previously at its peak
In the twelve months to March 2023, UK food inflation hit a staggering 19.1%, the highest it had reached in over 45 years. The spike was driven by a perfect storm of global supply chain disruptions that had occurred over the previous 18 months, which subsequently led to significant increases in the costs associated with delivering food to the UK market.
The hangover of the pandemic on global supply chains was compounded further by the more recent Russian invasion of Ukraine in February 2022, which had a major impact on the international supply of grains and fertilisers. European energy prices also surged as a result of the conflict, especially in gas and electricity, which, in turn, inflated both production and transport costs.
Furthermore, post-Brexit trade frictions added further costs and delays to imported goods, whilst labour shortages in agriculture and logistics left some crops unharvested and pushed wages up even further. Meanwhile, droughts and cold snaps in Europe and North Africa also led to higher imported food prices as a result of supply shortages of the key crops the UK relies on.
Fast forward to May 2025, and while food inflation has cooled to 4.4%, it’s still a significant pressure point for many UK households, where it has been trending above the long-term average of 2.7% since the beginning of this year.
May marked a second month of recent increases; in the 12 months to April, the cost of food and non-alcoholic beverages grew as sharply as it had fallen the month before, increasing to 3.4% according to the ONS. In March, it had dropped to 3.0% from 3.3%, where it had been since the start of 2025. May, in fact, marked the highest level it had reached since February last year (Figure 1).
However, whereas the significant surge in food inflation we saw in early 2023 was both global and systemic, it is clear that the current price rise is much more domestically driven. Although elevated above the historical norms, the impact is currently less severe and subject to fluctuation.
Domestic fiscal policy compounds some of the more typical influences on growing food inflation
The April 2025 rise in the National Minimum Wage and increases in National Insurance contributions evidenced in last October’s Budget, have raised costs for farmers, costs which are passed along the supply chain to retailers who, experiencing their own labour cost increases, have subsequently passed these costs on to the consumer. The consequence of the government’s fiscal policy has added to a confluence of more common factors that negatively influence food prices and have therefore intensified the impact on food inflation.
Most recently, the cost of producing fresh produce has also risen. Extreme weather, both at home and abroad, such as floods, droughts, and heatwaves – supercharged by climate change – have impacted crops in the UK as well as key supplier countries like Spain and Morocco. Heavy rainfall across the UK during spring 2025 left fields waterlogged, delaying planting and damaging crops. Furthermore, farmers have also faced higher input costs for fertiliser, energy, and packaging – costs that have also been passed on to consumers.
However, the recent increases in food prices have been driven as much by changing consumer trends as they have by production and delivery cost increases. Shoppers are buying more fresh fruit – 2,400 packs of strawberries were sold every minute in early June, according to Kantar – driving up demand just as supply has become constrained.
Wholesale beef prices, in particular, have increased due to a tight squeeze on supply, strong demand, and rising production costs. The UK’s beef breeding herd has shrunk significantly, down 13% since 2022, due to years of poor profitability and rising costs. Fewer calves mean fewer cattle reaching slaughter weight, tightening supply just as demand remains strong. Figures from the Department for Environment, Food & Rural Affairs (Defra) showed the total slaughter of cattle and calves from January to April 2025 was 4% lower than the same period in 2024.
Like any rise in food inflation, the most recent increase will undoubtedly hit lower-income households the hardest as they typically spend a larger share of their income on essentials like food
Sam Arrowsmith, Director, Commercial Research
However, despite wider consumer cost pressures, appetite for beef has stayed robust. Although the price of food and everyday essentials has risen faster than incomes for many, beef is an item on the menu which the British population is reluctant to go without. Retail spend on beef was around £5.2 billion in the year at the end of March 2025, rising 4.6% year-on-year (YoY), with both price and volume up.
Although narrowing, the disparity between foodstore sales value and volumes continues to impact lower-income households most markedly
Like any rise in food inflation, the most recent increase will undoubtedly hit lower-income households the hardest as they typically spend a larger share of their income on essentials like food. As a result, even modest price increases bite harder; a surge in prices for grocery staples such as fresh fruit and vegetables, dairy and meat means such households have less room to economise as prices rise.
With retailers continuing to pass on the cost of wage hikes and higher taxation to the consumer, most notably in budget and discount chains where margins are already thin, we see a disproportionate impact on families with tighter budgets, especially as it is such households that might typically rely on the value operators to purchase much of their essential groceries.
Figure 2 highlights the disparity between foodstore sales value and volumes, one that has existed since late 2021, when the price of many essential goods in the UK began increasing faster than household incomes. Although the subsequent cost-of-living crisis has dissipated comparatively, consumers are still currently paying more for their groceries and taking home fewer items. On a rolling twelve-month basis, volumes fell by 1.3% in May, whilst values grew by 0.8%, according to ONS data.
Kantar reports similar findings. Like the ONS data, its measure of overall grocery volumes saw the first YoY decline in 2025 in the four weeks to June 15, falling slightly by -0.4%, while take-home grocery sales grew by 4.1% compared with last year.
Nevertheless, higher prices didn’t stop shoppers from making 490 million trips to the supermarket over that time, averaging almost 17 per British household, the highest recorded since March 2020. The rise in frequency was duly balanced out by a drop in average trip spend, which fell back by three pence to £23.89.
However, households have been adapting their buying habits to manage budgets for some time, with many consumers choosing to switch at least part of their grocery shop to the discount operators, or indeed trade down and seek out own-label brands and spending promotions. With consumer concerns over price clearly continuing, Kantar reports that sales of own-label ranges grew at 4.2% in the month to mid-July, ahead of branded lines, as shoppers looked to balance their budgets.
In fact, premium own-label lines have been the fastest-growing part of the market since September 2023, whilst deals also remain an important tool for retailers to offer value and maintain brand loyalty. The proportion of spending on promotions stepped up to 28.8% in this period, with those consumers who feel the pinch the most continuing to seek out such promotions to get the best value. Trimming prices remains the most popular way for retailers to draw in customers, with 80% of promotional spending in this period down to straightforward price cuts.
Despite long-term improvements, consumer confidence continues to fluctuate month-on-month as economic uncertainty prevails
Although certainly a reflection of the wider current economic headwinds and inflation overall, Figure 1 highlights how consumer confidence closely tracks food and beverage inflation, emphasising how consumer sentiment closely associates with the cost of essential spending; food and groceries remain an indispensable part of any consumer's budget.
On a rolling twelve-month basis (designed to smooth out the seasonal fluctuations and observe the overall trend in your data), consumer confidence has greatly improved versus the March 2023 peak for food inflation, when the index reached -42.1, the lowest it has been this century. The yellow line in Figure 1 tracks its gradual improvement since the cost-of-living crisis, with the most recent index for May 2025 at -18.3.
However, May marks the second month this year that consumer confidence has fallen further, remaining below the -13.2 average covering the last 25 years – a position it has held since just before the pandemic in February 2020. What is clear is that the economic headwinds and pressure on consumer finances are starting to tip the balance back toward a negative trajectory.
Nevertheless, if we look at consumer confidence on a YoY basis, the monthly results are much more nuanced (Figure 1). As the consumer digests the monthly news cycle, confidence inevitably fluctuates. Retailers warning of higher prices, exporters warning of cancelled orders, and businesses warning of job cuts undoubtedly negatively impact consumer sentiment and potentially lead to a tightening of purse strings for many. Conversely, as the Bank of England (BoE) tinkers with interest rates in an attempt to counter any economic downturn, sentiment improves for some and encourages more spending, hence the see-saw nature of the monthly consumer confidence trendline in real terms, seen in Figure 1.
To illustrate, apprehension surrounding the impact the new government’s first Budget would have on consumer finances back in September last year seemed relatively short-lived, with the months following seeing improvements in consumer optimism. The GfK’s overall consumer confidence index improved to -17.0 in December from -21.0 in October.
However, the index subsequently worsened to -22.0 for January before improving again in February (-20.0) and March (-19.0), clearly highlighting the unstable nature of the UK consumers’ attitude toward the current economy. The latest recording for May saw the inevitable, with the index swinging back to negative growth following the uncertainty the US tariff proposals placed on the global economy, rising inflation and the BoE’s June announcement to hold interest rates at 4.25%, instead of a further cut as it had done twice previously since the start of the year.
Will inflation get worse, and what is the outlook for consumer confidence?
Perhaps most importantly, consumer perception of their own personal financial situation over the next twelve months swung back into positive territory (+2.0) in May, suggesting that the consumer is currently more optimistic than pessimistic about their future finances than was the case in April, when the opposite was true.
Will this optimism last? It seems that any measure of consumer confidence is volatile and seemingly worsens with any potential emerging economic challenge, before conceivably improving when the potential impacts are perhaps better understood.
However, the ongoing conflict in the Middle East is a potential global disruptor that could push UK inflation higher, mainly through energy and trade-related channels. This is likely to put further downward pressure on consumer confidence, depending on the severity of what is to come.
The region is a major hub for global oil and gas. If tensions escalate, especially with threats to the Strait of Hormuz (a key shipping route for 20% of global oil), Brent crude prices could spike to $100–$110 per barrel, according to Goldman Sachs. A $10 increase in oil prices typically adds 0.1 to 0.2 percentage points to UK inflation, both directly (including fuel and energy bills) and indirectly (through transport and production costs).
Conflict could also disrupt shipping through the Red Sea and Suez Canal, key routes for UK imports. This would raise freight costs and delivery times, feeding into higher prices for goods. Furthermore, the conflict could create additional interest rate uncertainty; the BoE may delay interest rate cuts further if inflation ticks up again.
This, of course, would very likely further increase consumer budgetary pressures. Higher energy and transport costs could raise household bills and food prices, potentially triggering a new wave of cost-of-living strain.
In short, while the full impact depends on how the conflict unfolds, the UK is vulnerable to energy shocks and global trade volatility. Economists estimate that if current energy prices hold, UK inflation could rise by 0.1 percentage points in Q3; however, while the immediate inflationary impact is modest, the risk premium is rising, and the scale will depend on how the conflict evolves. If energy flows are disrupted or the conflict widens, the inflationary effect could become much more pronounced.
In addition, the government’s Autumn Budget is expected to also have a modest but noticeable upward impact on UK inflation, particularly in the short term. Further tax hikes, especially on employer national insurance contributions and capital gains tax, could raise business costs, some of which may be passed on to consumers through higher prices. Increased public spending – notably on infrastructure, healthcare, and housing, as well as UK defence measures – could also stimulate demand, which can add to inflationary pressure if supply doesn’t keep pace. The Office for Budget Responsibility (OBR) revised its inflation forecast upward to 2.6% for 2025, from a previous estimate of 1.5%, citing the Budget’s potential direct and indirect effects.
In short, the Autumn Budget is likely to nudge inflation, and indeed food inflation, higher in 2025, but not dramatically. The real test will be whether the government’s growth agenda delivers enough supply-side improvements to counterbalance the short-term price pressures.
Perhaps more significantly is whether a deepening conflict in the Middle East will cause a sharp inflation spike similar to that witnessed at the start of the war in Ukraine, in contrast to the uncertainty and slower-burning risk it currently presents.
The current market value of the food and grocery market stands at £195.3 billion, and is set to grow by 9.6% to £214 billion by 2028. As a result, the market will have achieved a CAGR of 2.4% between 2023 and 2028 – a significant reduction on the five-year CAGR between 2018 and 2023, where sales rose at a rate of 4.7%. However, this is not concerning, considering that the past figure resulted from the impact of high food inflation levels in 2022 and 2023, according to GlobalData.
Instead, they expect the UK food and grocery market to achieve steady growth YoY, as volume growth returns and consumers feel more confident trading up to premium own-brands and branded goods. They suggest that for grocers, expanding ranges of dine-in multibuy offers, new product development, and a focus on bolstering impulse spending, particularly during occasions such as Christmas, will be essential to capitalising on improved volume uplifts as consumer financial confidence improves, with convenience becoming the more significant consideration than value in 2025.
However, whether this now proves to be true will depend to some extent on the implications of the Autumn Budget, as well as wider global influences such as US trade tariff policy requirements and the growing concern surrounding an escalation to the conflict in the Middle East. Each factor, singularly or collectively, could once again negatively tip the scale, causing food inflation to rise and consumers to tighten their belts once more.
Strong conversion rates appeal to and have helped drive positive performance for a number of key UK grocers; however, operators increasingly look to strategies that will help mitigate emerging cost pressures to try to maintain momentum
Savills analysis of data from GlobalData’s How Britain Shops survey highlights how the average UK conversion rates for the grocery operators surveyed are some of the highest in the UK, averaging 69.7% across the twelve brands analysed (Figure 3). This is significantly above the average for all retail across the UK at 59.3% (which encompasses all retailers in the survey), as well as that for predominantly in-town-only operators (whose consumers, on average, complete a purchase only 57.5% of the time). In fact, the conversion rates of grocery operators in the sector also sit well above the out-of-town (OOT) average, suggesting consumers are very purpose-driven when it comes to their grocery shop, and typically visit stores to make a purchase rather than to browse.
It is these strong conversion rates that continue to appeal to operators in this market and have helped drive positive performance for many of the UK’s leading brands. Back in February, following their annual performance results, Tesco had warned of lower profit expectations of between £2.8 billion and £3 billion in the new financial year as the grocer readied itself for intensifying competition in the UK market and, perhaps more significantly, a cost of £235 million to offset national insurance contributions.
However, Tesco has made a strong start to this financial year, enhancing its offer across all product lines, alongside boosting its non-food categories and online proposition. As a result, the brand has continued to grow its market share (Figure 4), solidifying its position as the leader in the UK grocery market.
The grocer reported 5.3% growth in group sales for the 13 weeks ending 24 May, fuelled by a robust 5.7% rise in UK sales. For the time being, the brand’s profit guidance remains unchanged; however, if Q1 momentum is maintained, an upward revision would become likely later in the year.
Tesco’s recent success has ultimately been driven by its move to enhance both its value and premium offers. On the one hand, it has recognised the rising costs and financial strain many consumers have endured in recent years, choosing to bolster pricing initiatives, including the Aldi Price Match on over 600 lines and 9,000 Clubcard Prices deals each week. Tesco’s emphasis on competitive pricing has elevated its value proposition in the eyes of consumers, reinforcing its standing as a trusted provider of high-quality food at accessible prices.
However, on the other hand, Tesco’s move to also reinforce its premium offer has been a shrewd one. Its Finest range has also played a pivotal role in its strong performance, with YoY sales rising by 18%. This premium line resonates with customers seeking distinctive, high-quality food options and reduces the likelihood of switching to rivals such as Marks & Spencer. This enables shoppers to trade up or down within Tesco’s own brand portfolio as their weekly finances allow, maintaining both customer loyalty and flexibility. As a result, food sales in the brand’s core UK market have risen by 5.9% in the first quarter of this financial year.
Morrisons’ latest positive results (for the 13 weeks ending 26 January 2025) indicate that the grocer has made progress in its turnaround plan, but, it too has begun to strengthen its financial position for the year ahead, implementing practical strategy enhancements ahead of expected turbulence in the UK food and grocery market, from rising food inflation, increased national insurance contributions, and minimum wage hikes.
The brand’s Q1 total revenue improved 2.4% to £4.0 billion, whilst in comparison, the UK food and grocery market grew at an average of 2.2% between November 2024 and January 2025, suggesting Morrisons has outpaced the market and improved market share. Having revealed savings of £56 million in its first trading quarter, Morrisons plans to make further cost-cutting measures within stores in Q2. This includes the intention to close approximately 70 counters, along with certain floristry services and cafés, as part of a wider investment reallocation strategy. While these changes aim to optimise operational efficiency and reduce overheads, they may pose a risk to customer loyalty, particularly among core demographics who value these services as brand differentiators. Morrisons needs to ensure that future store format revisions preserve key heritage elements and maintain appeal to older and family-oriented shoppers seeking a more personalised and experiential retail environment.
Preparation in readiness for worsening operating expenses remains a common theme amongst grocers despite strong performance results. The Co-op Group has also posted robust financial performance figures, with annual operating profit up 35% to £131 million, underpinned by a 1.9% rise in food retail revenue to £7.4 billion. Looking ahead, the group is set to expand its footprint, with plans to open at least 120 new grocery stores in 2025.
However, it has flagged emerging cost pressures stemming from geopolitical uncertainty, higher national insurance contributions, and the introduction of a new packaging levy. In response to growing competitive challenges, particularly from discount retailers, Co-op is also actively price matching Aldi on more than 100 essential items – a strategic move aimed at maintaining price competitiveness and customer retention.
Waitrose has achieved its strongest sales momentum in over three years, recording a 5.5% increase for the twelve weeks ending 14 June. This growth coincided with disruption at rival M&S following a cyber-attack and reflects the success of the John Lewis Partnership’s £1 billion transformation programme.
The ’New Lower Prices’ initiative – initially slow to gain traction since its launch in February 2023 – has since gathered pace, with volume growth of 2.6% in the year to February, and a substantial investment boost from £61 million to £150 million from the partnership.
As a brand synonymous with premium offerings, Waitrose must preserve its core value proposition. However, in the face of rising food inflation, the retailer will need to remain agile in pricing essential product lines competitively to sustain customer loyalty and unlock opportunities for internal trading up.
Sainsbury’s reported a solid start to FY2025/26, with total retail sales (excluding fuel) up 4.9% for the 16 weeks ending 21 June, supported by a 5.0% uplift in grocery revenues. The retailer also saw improvement in its traditionally weaker non-food division, though leadership remains cautious given ongoing fragility in the wider non-food market and Argos’ exposure to seasonal variability.
Acknowledging tougher trading conditions ahead, Sainsbury’s is focused on reinforcing its core grocery offer. Flagship initiatives such as the Taste the Difference range and Nectar Pricing are being prioritised to sustain volume growth and protect margins. During Q1, Sainsbury’s enhanced its value proposition by aligning Nectar Price discounts across 9,000 products, bringing parity with Tesco’s Clubcard pricing, and expanding its Aldi Price Match coverage to 800 items – outpacing Tesco’s reach.
While grocery performance trails Tesco’s 5.9% growth over the same comparative period, Sainsbury’s continues to sharpen its competitive edge amid persistent food inflation and elevated input costs. Strategic investment in pricing architecture is central to managing customer downtrading trends, while upgrades to premium own-brand offerings aim to capture a greater share of discretionary spending and position the retailer as a credible rival to the likes of M&S.
M&S itself has delivered another year of solid growth, marking its third consecutive annual uplift under the ‘Reshaping for Growth’ strategy. For the year ending 29 March, food division sales rose by 8.7%, supported by a 0.4 percentage point improvement in adjusted operating margin to 5.4%, signalling consistent volume growth across FY2024/25.
However, recent trading indicates a marginal deceleration in sales momentum, with food division growth slowing to 9.1% YoY for the twelve weeks to 14 June, down from 10.8% in the previous quarter. Despite this, performance remains robust in light of operational disruption caused by a cyber-attack over Easter, which affected product availability and temporarily halted online orders. M&S estimates a £300 million impact on profits, partially mitigated by an expected £100 million insurance recovery.
To broaden its customer base and elevate engagement, M&S has revamped over 1,000 product lines and introduced 1,400 new items. This innovation strategy has resulted in a 13% increase in basket sizes, reflecting evolving consumer behaviour and reinforcing M&S’s appeal as a practical grocery destination, beyond its traditional premium positioning.
Conversely, Asda has struggled of late, reporting a £599 million pre-tax loss for the year ending December 2024, marking a sharp reversal from the previous year’s £180 million profit. The downturn stems from substantial one-off expenditures, notably a £378 million impairment charge and £310 million invested in its ’Project Future’ IT overhaul.
Operational challenges have intensified, with like-for-like sales declining 3.4%, amid consumer complaints of product shortages and service issues. Despite implementing a rollback pricing initiative to improve competitiveness and availability, Asda’s market share has dropped to a historic low of 12.1% in the twelve weeks to 18 May – making it the only major grocer to post a sales decline of 3.2% during that period.
The retailer’s struggles have been compounded since its £6.8 billion acquisition by TDR Capital and the Issa brothers in 2021, constraining its ability to match rivals on price. Efforts such as extended operating hours and the revival of its Rollback promotions have been introduced to spur recovery, though elevated grocery price inflation presents continued headwinds. Nevertheless, with the core business remaining profitable, delivering a pre-tax profit of £115m before exceptional items, Asda is keen to point out its recent non-recurring costs that do not reflect the underlying performance of the business.
Discount operators continue to see market share growth as consumer cost pressures persist
Once again, following a sustained period of consumer belt-tightening and the potential for further prudent household budgeting, the discount grocers have seen their sales performance grow, subsequently positively impacting their market share.
Aldi and Lidl’s strong performance is underpinned by lean business models that prioritise efficiency and value. Their low operating costs – enabled by compact store formats and minimal staffing – help maintain competitive pricing. A heavy emphasis on private-label products reduces sourcing expenses while increasing profit margins. Additionally, vertically integrated supply chains allow the discounters to swiftly respond to inflationary pressures and market disruptions. These strategic advantages continue to fuel their growth and resilience in the UK grocery sector.
Aldi now holds 11.1% of the UK grocery market, up from earlier figures, with sales rising 6.5% over the four weeks to 15 June. Lidl, meanwhile, has reached 8.1% market share (Figure 4), gaining 0.5 percentage points YoY, with 11.2% sales growth measured over the twelve weeks to 15 June 2025. This marks its third consecutive month of double-digit growth, reinforcing its position as the fastest-growing bricks-and-mortar grocer in the UK during that period.
Aldi and Lidl’s continued price leadership stems from their ability to cultivate a strong value perception among shoppers, who rely on their consistently low prices without the need for loyalty programmes or heavy promotional activity. By aggressively matching prices – often maintaining noticeable gaps versus traditional supermarket chains – they appeal directly to budget-conscious consumers seeking everyday affordability.
As a result, their continued expansion – through aggressive pricing, store openings, and value-led strategies – has helped them close in on traditional players like Asda and Morrisons. Aldi, for instance, plans to open 40 new stores this year as part of a £1.3 billion investment programme. Both brands are indeed particularly savvy when it comes to their data-led store opening approach, with new locations often targeting underserved areas and inflation-hit communities.
OOT grocery openings remain well below the annual long-term average, but are dominated by the expansion of the market's value-oriented operators
Figure 5 highlights Lidl and Aldi as the most acquisitive grocers in the OOT market in 2024, opening 14 and 11 new stores, respectively. 2025 has continued in the same vein, with Lidl opening twelve stores and Aldi five in the year to date.
Overall market growth is demonstrated in Figure 6. The market saw 43 new foodstore openings last year, with as much as 86% of those openings coming from value or discount brands. So far this year, we have already seen the same number of new lettings as the likes of Aldi, Lidl, Iceland, and Farmfoods intensify their growth strategies – again, as much as two-thirds of new space is attributed to value-oriented operators.
What is undoubtedly evident, however, is how much new grocery openings have fallen below the long-term average – a fact clearly out of sync with the aggressive growth strategies of a number of key brands. A lack of supply is the simple explanation, rather than any retreat in appetite. The retail warehouse market sees little to no development, and with vacancy at only 4.7% and falling, even despite the recent Carpetright and Homebase administrations in the sector, the opportunities to satisfy the appetite of the expansionists are increasingly scarce.
Rental value index growth for supermarkets is a reflection of the lack of supply for acquisitive operators
The lack of supply goes some way to explaining the MSCI rental value index growth improvements evident of late. Although still in negative growth territory (Figure 6), the index for supermarkets is rising due to strong and stable occupier demand, limited new development, and consistent grocery sales performance that supports improved rents.
In the OOT retail market, lease consultants often struggle to demonstrate rental growth at reversion due to limited transactional evidence, contributing to a historically subdued, but gradually improving, growth narrative. Nevertheless, supermarkets continue to serve as vital retail anchors, consistently generating strong footfall and stable sales, even in challenging economic conditions. As a result, lease regears and renewals are becoming increasingly attractive, with grocery operators prioritising long-term occupancy at high-performing, strategically located sites.
Furthermore, supermarkets remain essential retail anchors, with consistent footfall and resilient sales, even during economic downturns; therefore, lease regears and renewals are increasingly preferable, as grocers seek to secure long-term occupancy at strategic sites. Since the pandemic, grocery turnover has outpaced rent growth, improving affordability relative to store performance. Operators are now willing to pay higher rents for well-performing stores, especially where rent-to-turnover ratios remain within the industry standard of 5% or below.
The appeal of online grocery shopping weakened in the backdrop of soaring inflation, due to higher fulfilment costs and limited control over product quality, substitutions, and shelf life – factors that diminished perceived value for money
Sam Arrowsmith, Director, Commercial Research
Furthermore, supermarkets are increasingly viewed as community hubs, reinforcing their long-term investment appeal. Long lease durations and index-linked rent reviews (often tied to RPI) offer stable, inflation-protected returns for landlords. Institutional investors are therefore actively targeting supermarket assets, further supporting rental growth.
With rising cost pressures, consumers shifted the focus of their spending back to physical stores. However, will 2025 mark the beginning of a strong rebound in online grocery sales?
UK online food and grocery sales rose by 3.7% to £19.6 billion in 2023, yet market penetration declined by 0.4 percentage points to 10.3%, as consumers shifted spending back to physical stores. The appeal of online grocery shopping weakened in the backdrop of soaring inflation, due to higher fulfilment costs and limited control over product quality, substitutions, and shelf life – factors that diminished perceived value for money.
However, amid the ongoing cost pressures for both occupiers and consumers, value for money has re-emerged as a central pillar of operator strategies. Ocado exemplified this in FY 2024, delivering a strong trading performance, particularly in Q4, where retail revenue rose by 17.5% to £715.8 million. This growth was fuelled by a 12.1% increase in active customers and a 16.9% rise in average weekly orders, while volumes and basket sizes remained stable. Crucially, Ocado’s sustained investment in price and value played a pivotal role in enhancing customer satisfaction and service quality – an approach that is likely to remain effective should food inflation continue to exceed historical norms.
Online grocery spending continues to grow, but its success is fundamentally intertwined with the physical store network, which a dynamic UK retail property market should embrace rather than resist. Brick-and-mortar stores serve as vital fulfilment hubs, enabling efficient click-and-collect services, reducing delivery costs, and enhancing speed. They also offer trust and convenience, particularly for fresh produce and last-minute top-ups. Retailers with dense store footprints, such as Tesco and Sainsbury’s, are well-positioned to deliver seamless omnichannel experiences. As a result, lease structures and investment strategies increasingly reflect the dual role of stores as both retail and logistics assets. In short, while online grocery spend is rising, its scalability and profitability are deeply linked to the physical store infrastructure. Ultimately, grocers that integrate online and offline channels effectively are best placed to capture sustainable, long-term growth.
Rapid delivery growth supported by the expansion of convenience stores
UK grocers are expanding their convenience store formats to meet shifting consumer behaviours, particularly the demand for speed, proximity, and flexibility in shopping. The rise of hybrid working has increased reliance on local stores for top-up purchases and food-to-go. Smaller-format stores also serve as strategic fulfilment hubs, supporting rapid delivery and click-and-collect services, while enabling grocers to reach omnichannel shoppers who tend to spend more.
With lower overheads and faster rollout potential, these stores offer an efficient way to grow market share and enhance brand presence in underserved areas. As competition intensifies, retailers are also using convenience formats to trial pricing strategies and digital innovations, positioning them as key assets in long-term growth and customer engagement.
Tesco announced early in 2024 its plan to open 150 new Express stores by 2027, aiming to strengthen its footprint in high-traffic areas and enhance quick commerce capabilities. Sainsbury’s, as part of its ’Next Level Sainsbury’s’ strategy unveiled in November 2023, intends to add 75 Local stores over three years, alongside format rebalancing that prioritises food-first retailing in underserved communities.
Meanwhile, Lidl, with a £500 million investment disclosed in January 2025, is targeting 40+ new store openings this year to reach 1,100 locations by year-end, focusing on town centres, retail parks, and high streets with upgraded store designs. Asda, under chairman Allan Leighton’s turnaround strategy revealed in April 2025, plans to open 25 new Asda Express stores between June and December, largely through conversions of Co-op and EG Group sites, whilst Morrisons announced in June 2024 its intention to expand its Morrisons Daily format to 2,000 stores by the end of 2025, following its integration of McColl’s locations and a strategy centred on affordability and localised services.
The UK’s fast delivery landscape is undergoing a strategic shift, with physical stores emerging as the cornerstone of future success
Sam Arrowsmith, Director, Commercial Research
Waitrose, as part of a £1 billion investment plan announced in August 2024, will open up to 100 new convenience stores by 2029, alongside upgrades to 150 existing locations. The strategy includes franchised outlets and smaller-format stores in areas like Bristol, Cambridgeshire, and West Sussex, reinforcing Waitrose’s role as a premium, community-focused retailer.
Co-op, in a statement released in January 2025, confirmed plans to open 75 new stores this year – 25 directly operated and 50 franchises – while refurbishing 80 existing sites. The expansion supports Co-op’s goal of maintaining a presence in every UK postal area and enhancing its role as a local hub offering parcel services, quick commerce fulfilment, and member-focused benefits.
Convenience stores provide an opportunity to expand rapid delivery capabilities and meet demand for food-to-go and last-minute shopping journeys. The UK’s fast delivery landscape is undergoing a strategic shift, with physical stores emerging as the cornerstone of future success.
While rapid delivery startups like Getir and Zapp characterised booming pandemic-fuelled growth, their retreat from the UK market highlights the challenges of sustaining low-margin, high-speed operations without a robust store network.
As consumers became increasingly more value-conscious, the premium for immediacy became less appealing and, as a result, many early disruptors have scaled back. Getir, once valued at $12 billion, exited the UK and other European markets after acquiring Gorillas, citing unsustainable margins and low order volumes. Meanwhile, Zapp, another rapid delivery startup, has focused its most recent UK strategy on streamlining operations to serve affluent London neighbourhoods with premium product offerings and store-level profitability, following significant downsizing and market withdrawals.
In contrast, traditional grocers are stepping in with more sustainable models, using their physical stores as fulfilment hubs to power fast delivery services. Co-op’s launch of the Peckish app and partnerships with Deliveroo exemplify this shift, enabling independent retailers to offer rapid delivery while leveraging existing store infrastructure.
Major supermarkets are also forging alliances with platforms like Just Eat and Uber Eats – Waitrose, Morrisons, Sainsbury’s, and Iceland among them – outsourcing logistics while anchoring operations in their store networks. These stores provide proximity, trust, and efficiency, especially for fresh produce and top-up missions. Tesco’s Whoosh and Sainsbury’s Chop Chop remain active, but are now part of broader omnichannel strategies that blend digital convenience with physical reliability.
Ultimately, the physical store is no longer just a point of sale; it’s a logistics asset, a community hub, and a strategic enabler of digital growth. As consumer expectations evolve toward speed, sustainability, and flexibility, grocers that integrate fast delivery with their store networks are best positioned to lead the next chapter of retail innovation.
In essence, the UK’s fast delivery landscape has shifted from startup-led disruption to supermarket-led integration, with convenience, sustainability, and strategic partnerships driving the next wave of innovation, with the physical store at its heart.
UK foodstore transaction volumes have remained below the long-term annual average since 2022, due to limited supply of prime assets and strategic shifts by both investors and operators.
While headline figures in 2023 were boosted by a few large sale-and-leaseback deals, conventional investment activity remained subdued – less than £1.53 billion in total compared to the ten-year average of £1.69 billion.
In 2024, volumes continued to lag, with grocery-anchored and convenience store property deals totalling £1.51 billion. This figure closely mirrors the year prior, courtesy of a sharp 194.1% surge in Q4 deal activity versus that seen in 2023.
2025 got off to an even poorer start versus the previous two years. Volumes in Q1 lagged 74% behind those seen in Q1 2024, totalling £233.3 million spread across only 19 deals (versus 70 in the same period last year). Q2 has seen some modest recovery, however, 215% ahead of Q2 in 2004 and in line with volumes seen in Q2 2023.
Crucially, this restraint in deal volume reflects a shortage of quality stock rather than fading investor interest. Investor appetite for grocery assets remains robust, attracting interest from both domestic and international buyers despite economic uncertainties. This resilience stems from the sector’s core role in everyday consumer spending and its ability to deliver stable returns even amid broader economic challenges.
In the past few years, a number of supermarket chains have unlocked capital by selling properties they own and leasing them back, thus underpinning the trust investors see in this market. However, margin pressures driven by inflation and aggressive occupational discounting have shifted operators’ focus toward operational efficiency rather than asset sales, constraining new stock availability.
This limited availability, alongside falling interest rates, has intensified competition for well-located supermarket assets, particularly those owned by major retailers such as Tesco and Sainsbury’s. Investor confidence remains anchored in grocery’s long-term income profile. Lease structures typically span 15 to 25 years, featuring upwards-only rent reviews linked to RPI, CPI, or fixed increments. Strong tenant covenants reinforce the asset class’s defensive characteristics, making them especially attractive to institutions and long-income funds. UK funds have returned to the sector, driven almost exclusively by the best-in-class assets.
However, the dynamics of sale-and-leaseback activity have shifted significantly over the past 15 years. Between 2010 and 2014, Tesco and Sainsbury’s accounted for the majority of activity, completing 49 transactions to release capital. However, both operators now benefit from a stronger financial footing, enabling them to switch from asset disposals to strategic acquisitions aimed at reducing their rental overheads. Nevertheless, operators with more leveraged positions – such as Morrisons and Asda, who own a larger proportion of their larger format stores – are now expected to revisit sale-and-leaseback strategies to fortify balance sheets, potentially replenishing market supply.
From a pricing perspective, the market has experienced positive yield compression, returning to its long-term equilibrium. Current yields stand at 5.25%, underscoring the sector’s position as a defensive, income-secure asset class. This follows a temporary widening to approximately 6.00% in Q4 2023 – a period marked by elevated supply levels and a shift in buyer composition, creating an atypical contrast in market dynamics. Amid economic uncertainty and inflationary pressures, investors continue to favour grocery-anchored properties for their dependable rental streams, underpinned by long-term leases with national operators that typically offer strong covenants and often agree to inflation-linked rent reviews, shielding income from market volatility.
Moreover, the fundamentals driving supply and demand remain supportive: new grocery developments are relatively scarce due to land constraints, planning hurdles, and high construction costs. This limited pipeline has protected values and compressed vacancy rates, reinforcing investor appetite. In parallel, sale-and-leaseback activity by major retailers has unlocked high-quality assets for the investment market, allowing occupiers to raise capital while still retaining operational control – a structure that appeals to long-term, income-focused investors.
Additionally, food retailing has demonstrated exceptional resilience during macroeconomic shocks, including the pandemic and recent inflationary cycles. With consistent footfall and non-discretionary consumer spending, grocery tenants have seen robust performance relative to other retail categories. This has elevated the sector’s appeal among institutional investors, particularly those seeking portfolio diversification and capital protection.
Taken together, these factors have created a climate of yield stability, even as other segments of the commercial property market face pricing adjustments and valuation pressure. Investors remain confident that grocery assets will continue to deliver steady returns, supported by strong operational fundamentals and enduring consumer demand.
In short, grocery yields have stayed in a tight band because the sector offers low volatility, strong tenant profiles, and dependable cash flow – qualities that investors prize in uncertain economic conditions.
Outlook
Appetite for supermarket investment likely to remain strong despite economic uncertainty
Looking ahead, demand for supermarket investments is likely to remain resilient. While volatile or, at best, slowing interest rate reduction may dampen short-term liquidity among certain buyers, high-performing stores in strategic locations will retain pricing strength. Property investment companies are likely to continue dominating the buyer market, with sale-and-leaseback deals set to generate capital for new owners in the supermarket sector.
Larger, omnichannel stores continue to be the preferred option for investors, although continued stock growth in smaller units (led primarily by the discount operators or high street convenience-led rollouts by the Tesco, Waitrose and Co-op) could bring additional smaller units to the market over the next few years.
So far this year, as much as 78.2% of capital contribution in this sector has come from cross-border buyers, whilst REITs make up the majority of sellers. This is reflective of Supermarket Income REIT (SUPR) entering into a strategic joint venture with US-based investment giant Blue Owl Capital in April this year.
The deal essentially acts as a strategic alliance combining expertise and funding to expand investment in UK grocery assets and potentially signals a pivotal moment for the UK supermarket property market – one that could reshape investor dynamics and amplify capital flows across the sector in the years ahead by deepening institutional confidence, improving liquidity, and increasing deal momentum.