Monday, 30 November 2015

Aldi and Lidl – How Big Can They Get?

This is a question being addressed with some trepidation in the boardrooms of traditional supermarkets, their anxiety heightened by the news that  Aldi and Lidl combined have now reached a 10% share of the Uk grocery market.  What is particularly scary is that it took 9 years for Aldi and Lidl to get from 2.5% share to 5%, but only three to double again to the current 10%.
 At the moment they seem unstoppable.

For starters they are building more stores at a time when all other supermarkets are contracting. Aldi and Lidl between them have plans to open 171 new outlets, compared with 29 for the Big 4, and Lidl has stated that it wants to more than double its number of stores, from 629 now to 1500. Aldi is aiming for 1000.

And , a factor that is not often commented on is that both companies are privately owned and so, unlike the Big 4, (Tesco, Sainsbury, Asda and Morrisons) are not constrained by shareholder demands for ever higher profits. The discounters can invest as much as they want, be it in ever lower prices, or store refurbishments, or colossal marketing campaigns, without wondering how the City will react.

Their aggressive marketing seems to be working. According to research company Kantar Worldpanel, Aldi and Lidl have added 1 million more shoppers in the last year, and they have gone more up market, with the result that 31% of their shoppers are now in the wealthier AB social group.

They have taken the upcoming Christmas season very seriously with blanket advertising campaigns, and glossy brochures given away free in Saturday and Sunday papers. A flip through the Aldi brochure reminds readers that they can buy Canadian lobster, British free range goose,  British RSPCA assured Bronze free range turkey, British leg of lamb, and British Caramel and Bourbon ham joint.

Lidl reminds us that it won “Grocer of the Year”, then points out its Marine Stewardship Council certified lobster, RSPCA assured pork, British Bronze turkeys, organic and free range eggs.
How clever to acknowledge major consumer trends in this way – British, welfare friendly, and a bit special.

Both companies pride themselves on their wine and spirits expertise, and compete well with the big 4. Aldi in particular has recognised a competitive opportunity by setting up an online wines and spirits arm, which, some suggest will compete with thatt offered by Waitrose.

So far so rosy. What might stop the march of the discounters?

Four factors could hinder growth

First, Aldi and Lidl might lose sight of what made them great in the first place, namely rock bottom prices . This is what happened to Morrisons who, in an effort to broaden appeal to more affluent shoppers, took their eye off their core customers who could no longer find the good value to which they were accustomed, and were turned off by gimmicks such as misted vegetables and overly fancy foods. There are already signs that this could be happening to Lidl who are refurbishing stores and changing their range of goods to more closely resemble premium outlets. 

Secondly, the big 4 might take decisive action on becoming price competitive, as opposed to tinkering around the edges, which is the case at the moment. Asda for example say that they have reduced the price gap between themselves and the discounters to 10%, and are aiming for a 5% gap. They say that 4 years ago the gap was 20%. Of course this assumes that the discounters would not reduce prices still further, leading to a zero sum game.

Thirdly, discounters might lose out because they do not offer online shopping, apart from the Aldi alcohol venture. Online growth is predicted to continue, as retailers make their websites easier to use, particularly on smartphones and tablets, and more convenient with initiatives like click and collect.

Fourthly, many shoppers feel that they cannot  get everything they want from the limited range offered by discounters which means having to shop twice. There may be some who find this too inconvenient to bother with the discounters.  

Where might it end? Growth rates are slowing from the heady levels of a year ago, but still run at around 16%. The general consensus among industry watchers is that Aldi and Lidl will achieve a market share of around 15%, similar to that in Ireland, due mostly to store openings. Whether they get much beyond that is debatable.  In Germany, discounters have a 37% share, but the trade structure is different to the UK with fewer traditional supermarkets, but Source: BPEX).
even here there are signs that growth is levelling off.  In France, which has a grocery trade structure similar to the UK, the discounters got to around 14% market share, but traditional supermarkets fought back and share in 2014 fell to around 12%. (

One thing is not in doubt though – the discount grocers are now a significant part of the British grocery scene, and will continue to be so as long as they stick to what they are best at – low, low prices.

Sunday, 15 November 2015

Amazon Pantry Home Delivery – How Much of a Threat to Traditional Grocers’ Online Shopping?

The short answer is that Amazon will pose very little threat.

For starters, use of the Amazon service depends on being signed up for Amazon Prime, at a current cost of £79 a year, although there is a special offer of £59 for three days this week. Amazon won’t reveal how many Prime users it has in the UK, saying only that it is “millions”, but one would judge that it won’t be as many millions as are able to access online shopping without subscription handcuffs. Immediately the market opportunity for Amazon has shrunk.

Then there is the weird charging system for delivery. This goes by a price per box of £2.99p, with the ordering system telling you when your groceries are so bulky that they need to fit into another box, which costs 99p. Far less transparent than traditional online shopping where there is usually a set price up to a certain order value, and free thereafter.

And the  Amazon service is limited to dry goods only. It does not offer fresh produce such as meat, fish, vegetables or fruit. So the shopper either has to leg it to the supermarket, or has to log in to a traditional grocer to complete their weekly order, wait in for two deliveries, and probably pay a charge because this second order does not meet the minimum criteria for free delivery.

So what are the benefits of Amazon’s service?

Prices are cheaper in some instances. 100g Nestle instant coffee costs £3.00p from Amazon versus £3.30p in Tesco. However, Kelloggs Cornflakes 750g are the same price. Amazon is not offering branded goods at Aldi or Lidl prices which might have been an attractive strategy.

Shopping online is supposed to be easy and convenient. With membership a prerequisite, a complicated delivery charge, and only offering half of the groceries that are needed in the home, Amazon is anything but convenient. It is not cheap either.

Tuesday, 22 September 2015

Mixed Fortunes in Online – Waitrose down, Ocado static and Morrisons struggle with profit

The online conundrum continues. No one seems to have worked out how to find the holy grail of growth in both sales and profits.

Waitrose, purveyors of food to the well heeled, surprised market watchers last week with the news that their total like for like sales dropped by 1.3% in the last 6 months, the first decline in over 6 years. Even more surprising was the news that online sales plummeted by 13% due it seems to pulling out of promotional activity.

Ocado, equally upmarket, and an online only business, announced by contrast that its sales had grown by 15.3% in the last three months, roughly the same rate as in previous quarters.  Amount spent per order continues to drop.

Morrisons, who were late into online and partnered with Ocado to get going, did not declare sales, but CEO David Potts hinted at profitability problems, saying about the tie up with Ocado “ Its very important that it does become profitable growth. At the moment it is best expressed as an internet investment.”

Running an online operation appears to be a drain on both retailer and manufacturer profitability.

The Institute of Grocery Distribution just a week before the above results were announced published an article entitled “Five killerquestions to ask when moving online”. The third question, “can you invest for growth?”, resulted from  IGD’s finding that many manufacturers, even larger ones, are still mastering the basics of online retailing, and need to spend more money on developing their online offer, particularly in understanding shopper behaviour.

Operating in online grocery shopping does seem to come at a heavy financial cost.

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.