Friday, 21 August 2015

ASDA - A Strategic Mess




ASDA have reported a 4.7% drop in like for like sales in the most recent quarter, and have slipped from second to third place in the supermarket pecking order, behind Tesco and Sainsbury.

A once sure footed and far sighted competitor with a crystal clear strategy now finds itself floundering in a strategic mess.

Here’s why.

ASDA identified the danger posed by discounters as long ago as 2013, and immediately announced that it would invest £1billion in reducing prices. At the same time it decided not to run promotions but to stick with an “everyday low price “(EDLP)strategy, which is what the discounters do.

The rest of the supermarket players eventually woke up to the discounter threat and have responded by a combination of selective price reductions, regular heavy promotions such as buy one get one free, and a promise to match ASDA’s prices on branded goods.

So ASDA is stuck in the middle. It was never as cheap as the discounters and is unlikely to ever be, so its EDLP approach cuts little ice with the dedicated discount shopper. And it offers little benefit over the other mainstream players who have managed to reassure their customers that they cannot buy more cheaply elsewhere, and in addition offered a raft of extremely good deals. ASDA does have its "Price Guarantee" of being 10% cheaper than its major competitors, but this only comes in the form of a coupon after waiting three hours, going on line, and entering the bar code on the receipt. Too much of a hassle for most. 

As a result shoppers cannot see the point of going to ASDA, and have drifted away in droves.

Andy Clarke, ASDA Chief Executive Officer, reckons that sales have now stabilised, and the only way is up. He has mentioned the need to improve ASDA’s online shopping service, and to address the quality of its food, however, both would only bring ASDAin line with what competitors are offering. There is mention of further cuts to get closer to discount prices, and of moving into petrol forecourts to capture the convenience shopper.
These are necessary moves but do not sound like a game changer. Without anwers to the fundamental issue of why shop at ASDA as opposed to other supermarkets, the sales decline is likely to continue.



Friday, 7 August 2015

Why Lamb Eating Quality Must Improve

It is a bad time to be a sheep farmer. The price for each lamb sold is nearly 20% lower than this time last year. Few businesses in any sector can stand such a severe drop in their income.

The reasons for the price fall are well known. On the demand side, a strong £ versus the euro means fewer exports to continental Europe, the Chinese and Russian markets are weakening, and China is reducing tanning capacity so wants fewer hides.  Most worryingly of all UK domestic consumption continues its downward trend.  And at this time of weak demand, supply is rocketing as New Zealand extends its season and the highest volume of home produced lambs since 2008 are forecast to hit the market this year.

Of all the factors contributing to the price drop, the only one within the industry’s control is domestic consumption. There have been recent calls for retailers to pass the lower price they are paying on to their customers, thereby stimulating sales, and calls for some retailers, who should be thoroughly ashamed of themselves, to stop stocking New Zealand lamb at this time when UK lamb is at its best and the NZ version out of season.

Both would help, but they are merely a short term sticking plaster over the long term gaping wound of plummeting domestic consumption. The National Sheep Association in its “Vision for Sheep Farming” says that consumption has decreased by two thirds since 1990, from 7.5 kg per person per year to 1.9kg today.

The problem is this - consumers buying lamb are too often faced with a poor quality product, yet are expected to pay a premium price for it. And no one in the industry has grasped the quality nettle.

So what is “poor quality”?



The picture above, which is typical of what is sold in all of the supermarkets, illustrates the main problem which is fattiness. According to EBLEX 57% of consumers say that lamb tends to be fatty, and I would bet that the figure is higher among younger people.  The problem is compounded by retailers selling product where too much fat has been left on.  Indeed, Tesco has the gall to quote fat levels “when the product is trimmed of fat”. Often too, the bit of the product visible in the pack looks lean but turn it over at home and the underside is more fat than lean.

So put yourself in the position of the consumer who has shelled out for the most expensively priced meat on the supermarket shelf, and yet has to throw away as much as half of the product they bought. No wonder that 45% of people say that lamb is too expensive.

Lamb eating quality is also variable.  It is well known that the older the lamb, the tougher the meat. Ram lambs left entire develop odd flavours after about 30 weeks of age. Lambs fed on concentrates tend to become fattier, and their fat tends to be yellower which some consumers do not like.

So lamb is fatty, expensive and variable in quality. No wonder that the domestic market is declining at such a rapid rate.

The depressing thing is that all of this is well known, and has been for at least 20 years. The old MLC did a study in 1994 identifying the same issues.

Where will it end? It is not over dramatic to suggest that lamb will become a sideline product in UK supermarkets, only picked up by consumers when it is sold at a knock down price.  Already the amount of shelf space given to it is shrinking every season. It does not receive the same innovation push as other meats. Out of sight it will soon become out of mind to the average consumer.

With a small domestic market the industry infrastructure behind it will crack. Farmers will cease farming. There will be less abattoirs because volumes are too low for viability. Auction marts and hauliers will suffer.

The landscape will change too as sheep cease to graze the hills and moorlands.

Yes, there may well be an opportunity for niche lamb production, but the large scale lamb industry as we know it today will be no more.

Yet no one in the UK has shown the necessary leadership to galvanise the industry and get the problems solved.


Saturday, 4 July 2015

Online Grocery Shopping - Pointers to Making a Profit But no Easy Answers

Half year results from Ocado, the company which only sells groceries on line, show that profit before tax fell to £7.2m compared with £7.6m this time last year. The decline is attributed to paying off interest on debt and accounting for depreciation charges.  CEO Tim Steiner confirmed once again that he is not particularly bothered about short term numbers.

This lacklustre profit performance comes despite a 15% sales increase, which makes Ocado one of the front runners when it comes to generating growth.  Tesco is growing by about 11% and Sainsbury by 6%.

So if revenue growth alone is not enough to generate profits, what might?

The ability to offer high price high margin lines alongside more basic products is key. The heavy intrinsic costs of running an online business (capital spend, delivery and picking costs, website maintenance) mean that online will not work on a low margin mix.

A high market share in densely populated areas helps, as it avoids delivery vans having to drive miles between customers. This could explain why supermarkets offer very generous money off incentives to use their online service, and have substantially reduced charges for home delivery.

Cost efficiency is vital. Some supermarkets pick orders in their stores, but there is a trend to building  “dark stores”, which are purpose built fully automated warehouses, and considered by many to be a lower cost method of operating. Ocado, having no stores, has operated like this since the start. Indeed it feels that its proprietary technology is so cost efficient that supermarkets will pay to have access to it. They already have a partnership with Morrisons, and are rumoured to be on the point of signing up another company.

Even when assembling orders is done in store there are opportunities for continuous cost improvement. A recent survey found that best in class order assemblers are three times faster than the worst.

Click and Collect has been viewed as a further way of saving cost, as a separate fleet of vans is not required. However, John Lewis’s announcement this week that they will charge £2 for Click and Collect orders under £30 illustrates that even this mighty retailer  finds it challenging to make an acceptable return.

All of which suggests that there is no easy path to online profitability. Indeed Andy Street, CEO of John Lewis when announcing the new charge reportedly said that many web based business models have become “unsustainable and “bonkers”. Words probably worth remembering.






Wednesday, 10 June 2015

Grocery Growth Forecasts - Severe Implications for Supermarket Suppliers

The Institute of Grocery Distribution has just published forecasts of growth in the grocery market to 2020. In a nutshell they endorse trends already highlighted for online and discounters, saying that sales will continue to power ahead in these sectors. They signal that growth rates in convenience stores will decelerate, and that big stores, whilst remaining the place where most of us will do most of our grocery shopping, will show a sales decline.

One could challenge the exact numbers, for example the near doubling of online and discounter sales seems optimistic, but the shape of the growth makes sense, and whilst pages of commentary have been written about the effect of the forecasts on the grocers themselves, few write about the impact on suppliers – which could be huge.

Here’s why.

The key issues are the nature of the shopping environment in the growth sectors, and the steps mainstream supermarkets will  take to maintain profits as sales through bigger stores start to fall.

Consumers shop online for reasons of speed and convenience. Sitting in front of a small computer screen, or worse still, fiddling with tiny buttons on an even smaller smartphone or tablet, they just want to call up a previous order, tick what they need, possibly look at what’s on “special” and check out. Few can be bothered with browsing through hundreds pages of products on the off chance that they see something that takes their fancy. So, if a product is not on a favourites list, or being sold at a discount then it will not be bought.

Discounters too offer a different shopping environment. Typically they offer a very narrow range and stock few national brands. So the chances of getting listed by an Aldi or Lidl are small, which means that many suppliers will miss out on the discounters’ growth potential.

Convenience stores, who may be growing more slowly over the next years, but will still be a big sector, can only stock a limited range because of their size.

On the other side, mainstream grocers, grappling with falling sales in their big stores, are on a mission to streamline, which means stocking fewer brands and fewer pack sizes.

The outcome of all these factors means that the winners in the next 5 years will be:
-           big global companies who can buy their way into wherever they want to go. Examples are Coca Cola, Unilever, Nestle 
-          middle ranking companies who own leading brands with a loyal following. Examples would be Warburtons, McVities , Mueller
-          suppliers of retailers’ own brands who can operate at lowest costs
-           niche specialist players who appeal to supermarket operators because they offer something genuinely different, and who only require a listing in a small number of big stores to be viable.

Companies who may need a strategic rethink are those with brands which are rarely top of mind, non essential,  poorly advertised and promoted, and often bought on impulse because they caught the eye in store. Examples of this middle group might be Dairy Crest, Premier Foods, and smaller confectionery and soft drinks companies.

The impact on suppliers does not stop there. These middle ranking businesses also have suppliers and they too will be squeezed. Either their products will not be required, or they will have to offer sharp prices to maintain the business. We saw signs of this with Premier Foods “pay to stay” demands. Premier swiftly saw the injustice of this. Other businesses might not.




Friday, 8 May 2015

Discounters, Convenience, Online - Growth but Momentum Slowing

The general consensus among supermarket watchers is that to grow sales you have to be represented in  the three growth areas of discounters, convenience stores and online.

Today’s results announcement from Sainsbury, Tesco results a couple of weeks ago, and the most recent Kantar Worldpanel figures on grocery market performance all provide helpful detail about how the three areas are performing.

It remains true that these three areas are still showing fast growth, but the rate of increase is slowing markedly.

Discounters
Aldi and Lidl are coming down from the highs experienced in early 2014, when Aldi was clocking up increases of 30% plus, and Lidl was growing in the late teens. Latest data from Kantar indicates that Aldi growth has slowed to +15% and Lidl to +10%. These growth rates do though remain streets ahead of rival supermarkets who all, with the exception of Waitrose, are in negative  territory.

Convenience
Sainsbury has shone here with a 16% sales increase in the last twelve months. They opened 98 stores last year and remain committed to opening around the same number in 2015. Their growth suggests that by stocking the right quality and range, particularly food that can be translated into quickly prepared meals, shoppers will prefer to buy locally rather than trek to a supermarket.
Tesco has fared less well, with their Metro stores showing flat sales for the first 6 months of last year, but climbing back to growth of 4% in the final quarter. These rates are well ahead of their performance in larger stores, and may accelerate if Tesco turns their whole trading performance around.

Online
The battle for online shoppers is fierce. Most stores have dropped their minimum order size, Sainsbury, Tesco and Asda to just £25 and Ocado to £40. Delivery costs have been slashed through offers like delivery pass├ęs. First orders receive an attractive discount.
Despite these lures, growth rates are slowing. Numbers of orders are growing, but are not being matched by revenue growth. Sainsbury reported a 13% rise in orders but only 7% in revenue, Ocado in the first quarter grew orders by 18% but revenue by 15%. Tesco did not report orders but revenue grew by 11% in 2014. These growth rates are some way off levels seen in previous years. They suggest that talk of online sales doubling by 2019 are optimistic, and that the already very slim profit margins from online sales are being further eroded. After all, it must cost as much to process and deliver a £25 order as it does one of considerably higher value.

Growth but what about profits?

Whilst representation in discounters, convenience and online may provide the elusive growth so many retailers and suppliers seek, all three present severe challenges. Online is a huge drain on profitability for retailers, and difficult for suppliers of all but the most recognisable of brand names. How, suppliers will be asking themselves, do they remind online shoppers to buy their goods, unless they pay for visibility on the computer screen via money off promotions.

Convenience also poses profit challenges for retailers because of the high distribution costs involved, and suppliers face the issue of limited ranges being available in such small stores. Suppliers are also strapped when it comes to getting listings in discounters because they stock such a limited range.
Growth is achievable by supporting discounters, convenience and online. The challenge is to operate profitably whilst achieving the growth.





Friday, 20 March 2015

Are Grocery Shopping Habits Changing as Much as the Hype Leads Us to Believe?


Waitrose and Sainsbury have recently reported trading results. Waitrose’s were shocking on the profits front, down 24%. Sainsbury is struggling with declining sales, down 1.9% on a like for like basis for the 10 weeks to 14th March.

These two businesses are not alone in facing challenges. The average growth in sales through supermarkets changed from an annual average of 4.7% in the years 2008-13, to a growth of just 1.3% in 2014.

Conventional wisdom notes that deflation is playing a part, but attributes most of the slow growth to seismic changes in the way shoppers shop, citing the switch to discounters, the demise of the big weekly supermarket shop in favour of smaller buys from convenience stores, and  online shopping,

Few would deny that discount stores are taking sales from traditional supermarkets. Certainly price deflation is playing a part as commodity prices drop and mainstream stores try and compete with discounters. As for the rest, Kantar World panel, the research company, offers a different view, based on their panel of 30,000 households.

Kantar are saying that the number of supermarket trips per shopper each year has not changed – 221 trips in 2010, and the same in 2014.

Neither has the number of items per basket changed – it is 10.5 items per trip, the same as it was in 2010.

Nor are consumers shopping around more. The average household visits 5 different supermarkets every 12 weeks, just as they did 4 years ago.

The rise of convenience/ top up shopping seems somewhat exaggerated too. In 2010 40.5% of spend went on the main shop, it is now 38.8%. And sales through convenience stores grew by only 0.2% in 2014 compared with 2013. What is happening in the convenience sector is that the big supermarkets have expanded their reach into smaller shops, taking trade from the independent sector. The result is a virtually static market/

As to online shopping, this has contributed to growth rather than slowing it down.

So what is going on?

Understanding  grocery sector performance requires separation of slow market growth from structural changes. The main reasons for the big growth rates between 2008 and 2013 were rampant food price inflation and greedy supermarkets. Both are now being corrected as commodity prices fall and supermarkets scramble to be seen as cheaper, having realised that their rapid price hikes have left them exposed to damaging competition from the likes of Aldi and Lidl.

Structural changes impact profit in two ways. Internet shopping is considerably less profitable than store shopping. The former requires costly ordering systems, personnel to pick and pack the goods, and van drivers and vans to deliver to the customer.  In the latter the customer  bears all of that cost. The rise in internet shopping means fewer sales through  bricks and mortar stores, leaving them underutilised but as expensive to run as they ever were, a problem compounded by the rise of Aldi and Lidl resulting in even fewer customers walking through  traditional supermarket doors.

The one thing industry watchers do agree on is that prices will not rise any time soon, neither will grocery profitability 






Thursday, 5 March 2015

Retailers Key to Driving Organic Market Growth




The Soil Association's market report for 2014 shows a 4% rise in sales of organic products, a welcome return to growth for organic devotees.

The performance by type of product has been well documented. Sales of eggs were up by 16%, yogurts by 14%,chicken by 8%, and milk by 3%.Veg sales were down 2% as were sales of red meat and sausages, which dropped by 6%.

The strongest sectors for organic produce are dairy, which accounts for 28% of all spending on organic foods, and baby foods where over half of all sales are organic.

Attention has been drawn to the role of brands in driving growth. Yeo Valley sales are quoted as being up by 13%, and there is talk of good performances from Rachel’s yogurts, and Green and Black chocolate.

Less well documented is the pivotal part that retailers play in the fortunes of organics.
Milk growth is being powered by sales in Aldi and Lidl, which jumped by 410% and 166% respectively. And sales of fruit and vegetables were propped up by these two retailers both of whom now stock organic variants. Aldi claims that their organic offer saves shoppers 30% versus prices in bigger supermarkets. Ocado, the online grocery retailer saw sales grow by 14%, broadly in line with their overall sales trends. Riverford Organics, the online box delivery service posted an 8% growth in the year to May 2014, taking their sales to £44.4 million, and Abel and Cole, also in the box business,  reported sales of £65 million, which according to owners Wm. Jackson represented “strong growth”.

Conversely, mainstream supermarket performance was patchy, with the best results coming from Waitrose, up 3.5%
.
What this all may suggest is that the organic label on its own is not enough to guarantee a secure future. Sales success seems to be down to a combination of operating in the right categories, choosing a strong and committed retail partner, and ideally, building a powerful brand where being organic is just one aspect of what makes the consumer want to pick it off the shelf.