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.

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.

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.

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.