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.



Wednesday, 11 February 2015

Tesco Growing, Discounters Slowing, But No Sign of a Return to Traditional Shopper Behaviour

Its a funny old world when grocery market watchers are full of smiles when Tesco manages to grow by 0.3% in the 12 weeks to 1st February 2015, but signal gloom because discounters Aldi and Lidl “only” grew by 21% and 14% over the same period. (Kantar Worldpanel)

It depends where the start point is of course and a move into positive growth for Tesco after months of dropping sales probably does seem like a turning point. Equally, when a company has been growing by over 30% year on year as is the case with Aldi, then a slow down to 21% may seem like a turning point too.

What is clear though is that there is no sign of a rush back to traditional mainstream shopping patterns. Sainsbury's sales are declining by 1% and Asda by 1.7%, and the evidence suggests that the march of the discount grocers is likely to continue, albeit at slightly lower growth rates.

Take for example Aldi’s stated plans. They have committed to opening 70 more stores in 2015, and one of these will be its biggest ever, at 19,0000 sq feet compared with an average of 16,000 sq ft just now. More stores mean more shoppers, and bigger stores with their capacity to offer a wider range may mean a bigger spend per shopper.

There is no doubt that increasing numbers of us go to discounters. The IGD says that 55% of shoppers visited a discounter in December 2014 versus 36% in December 2010. This could be due to well publicised offers on alcohol, but there are also signs that increasing numbers are using discounters to do their main shop – 15% in December 2014 versus 3% in December 2010. And shoppers seem to like what they find when they get there - 52% of those visiting a discount shop spend over half their food and grocery shopping budget there.

Whilst it is the retailers who tend to get the headlines, the changing shape of the grocery market continues to cause headaches for suppliers. There are the well documented demands for reduced prices and extended payment terms from the big 4 mainstream grocers, and in a total grocery market which is growing by just over 1% the demands are rarely compensated for by growth. The problems then deepen, as the discount sector which is showing growth, tends not to stock brands, and buys most of its product lines from abroad.



Wednesday, 28 January 2015

Online Grocery Shopping - Growth Rates a Bit Disappointing?

Grocery market watchers still predict a doubling of growth in online grocery shopping by 2019, and are quick to criticise companies who seem not to be embracing the channel with gusto.

The enthusiasm is perhaps understandable. After all, many product sectors like books and music are nearly all bought on line, clothing is increasingly so, as are household goods.

Certainly, online is growing fast when compared with sales through stores. Tesco’s online sales over Christmas grew by 12.9%, Sainsbury  by 6%, Ocado by 14.8% and Waitrose by 26%.
   
However, the ONS tells us that total online sales of grocery products were up just 6% in December, and a look at trends through major grocers tells us that the rate of increase is slowing markedly. This despite heavy promotions,  the advent of click and collect and increased ownership of tablet computers and smartphones which are supposed to make the whole online shopping experience cheaper, easier, and therefore more attractive.

Retailers are ploughing enormous amounts of money into building their online presence.  Tesco is currently charging just £1 for certain delivery times, and allowing £15 off  the first shop. Ocado is offering £20 off the first shop and free delivery on a Wednesday. Sainsbury offers £25 off the first shop and £10 off plus free delivery for subsequent shops.  Asda charges just £2 per month for delivery. The low delivery charges are especially profit draining given the cost of getting an online order picked, put on to a van which has to be taxed, insured serviced and fuelled, and dropped at the customer’s front door.

Click and collect and the chance of shopping on high tech gadgets do not seem to be catching on in a big way. A look at IGD data examining shopping behaviour shows that as of October 2014 just 26% of online shoppers were using click and collect. Data to April 2014 shows 18% shop on a smartphone and  23% on a tablet computer.

The same data suggests that online is still used infrequently. 21% of online shoppers  use the channel every week, and a further 11% use it every 9 or 10 days.

It is interesting to compare the growth rates of online - heavily promoted, technology friendly, highly service orientated with click and collect or drop at the door – with those of Lidl and Aldi who offer none of that, and yet grew by 15% and 23% respectively in the twelve weeks to beginning of January.




Tuesday, 13 January 2015

Consumers Unwilling to Splash Out on Groceries– Even at Christmas

Perhaps the most surprising feature of Xmas trading results from the major supermarkets is that even at this traditional “throw caution to the winds and spend” time of year, shoppers were not prepared to loosen their purse strings when it came to food and groceries.

We do not know yet what total supermarket sales were like over Xmas, but given Tesco’s 0.3% decline in like for like sales, Sainsbury’s 1.7% drop,  a not unexpected plummet of 3.1% from Morrisons, and a disappointingly flat performance from Marks and Spencer who are supposed to be immune from penny pinching habits, the picture is unlikely to be rosy. Waitrose fared a little better, recording a 2.8% increase, and discounters Aldi and Lidl are both claiming their “best ever” Xmas, but as the combined market share of these three companies is just over 13% their better numbers will not compensate.

Hence the racheting up of price cutting announcements from the “Big 4”.  In a time of low inflation with shoppers just not prepared to spend on food, the only way for grocers to grow is by stealing market share. Tesco is to drop the price of 350 core lines, and claims that over Xmas some of its vegetables were cheaper than Aldi.  Asda is to spend £300m on cutting prices in the first three months of this year, and Sainsbury £150m.

Where will it end? Many in the industry are saying that prices generally will need to be rebased  regardless of the impact on profit margins. Morrisons chief executive, the second CEO, after Philip Clarke of Tesco to lose his job due to poor performance,  has declared that the only way forward is to “neutralise on price”, and then find ways to differentiate from the competition.

The big grocers will be able to manage their way through price wars more or less unscathed through a combination of slashing costs and offloading real estate. They can cherry pick which products to price reduce, and the scale and duration of any cuts. They can, and will, raise prices on many goods to offset reductions on others.

The unknown and little discussed issue is the knock on effect to others in the supply chain, many of whom are small businesses, already operating on wafer thin margins.  The drop in commodity prices will help. And there may be a boost to demand. Consumption of beef and lamb for example has dropped due to high retail prices. If, on the other hand, goods are already being produced at below cost, as in the case of some dairy farmers, then a boost to consumption does not help at all.

What is clear is that a low price, low growth , low profit world is here to stay for those connected with the grocery supply chain.






Friday, 12 December 2014

Thriftiness Now a Way of Life for Today's Food Shopper

Anyone who thought that shoppers would give up buying habits acquired during the recession may want to read the Waitrose Food and DrinkReport for 2014. Even those who visit this most upmarket of food retailers keep a close watch on what they spend. As Mark Price, Waitrose CEO says “Britain has become alot thriftier ...and that trend is here to stay”.

Budget consciousness, and its sister waste reduction are now ingrained across all ages and incomes. It means fewer trips to the supermarket, more buying only what is needed for that night’s evening meal, a constant eye on price, and more spending in discount stores like Aldi and Lidl.

Which  is not to say that consumers shun premium products buying only the cheapest, rather that in making a buying decision they want to be sure that they are not over paying, that the price charged is a fair reflection of quality, and that they could not buy similar products somewhere else more cheaply.
So we see that Sainsbury’s Taste the Difference premium range growing sales by 4% in the last 6 months when total sales were down 0.3% , and discounters cottoning on to the interest in premium products, offering expensive wines, lobster, free range Bronze turkeys, and luxury versions of standard favourites like puddings and mince pies. Waitrose’s own growth illustrates shopper willingness to buy the exotic, even if only occasionally, and the company says that 2015 will see further “premiumisation” with more luxury versions of standard foods like “uber special cupcakes”, new fancy doughnuts and ready to drink cocktails.

Amidst all the hype it is worth remembering that the vast majority of food spend goes on the basics - “sustenance and survival” in Waitrose’s words, and it is day to day expenditure that will receive greatest shopper scrutiny. The “Big 4” supermarkets have not fully recognised this, but are slowly seeing that budget consciousness is now a way of life for shoppers, and is here to stay. Asda has stated their commitment to closing the price gap with the discounters, and in a letter which will spoil Christmas for many, Tesco’s new CEO has indicated to his suppliers that as they are benefitting from falling commodity prices they may have to reduce their prices in January, as the company tries to compete against the discounters.

It is difficult to see anything but continued pressure on suppliers and ultimately primary producers, especially where products are heavily commodity reliant and have limited added value.