UK "Big Four" Supermarkets - A Busted Business Model

The woes of the big 4 supermarkets continue to fascinate watchers of grocery businesses. Latest Kantar worldpanel data for the 12 weeks ending 25^th May show Tesco sales down by 3.1%, Morrisons by 3.9%, and a struggling performance from Sainsbury, up 0.9%. Only ASDA seems to be holding up, managing to grow by a steady, if unspectacular 2.4%.

Meanwhile over at Aldi and Lidl sales keep soaring. Aldi’s usual trend performance of growing by over a third every quarter continues, and Lidl’s year on year growth has accelerated to 23%. Another low price player has started to make its presence felt - frozen food specialist Farmfoods grew by 27% over the same period.

A couple of commentators are beginning to draw parallels with the rise of low cost airlines. Easy Jet and Ryanair in the UK, and South West in the US operate with a basic service but extraordinarily low prices. Just like Aldi and Lidl they worked out where costs could be stripped out, and in so doing left the big carriers like BA, Air France and Lufthansa floundering.

And so it is with the “Big 4” Uk supermarkets. All have identified that what they are doing now is not working. Tesco, Morrisons and Asda have resorted to price reductions. Sainsbury hope that a superior quality own brand offering plus selective price reductions will help.

But reduced prices have to be paid for somewhere along the line, and the cost base has to be examined.

The challenge for the supermarkets is to identify what their shoppers would class as a “frill” which could be sacrificed to pay for low prices, and what is a critical part of the reason why they shop at a particular supermarket.

 This is where a good look at the value of online investment might be useful. Neither Aldi nor Lidl has an online offer and it does not seem to be holding them back. Morrisons poor performance has been laid at the door of no online, but the performance of all the other supermarkets would suggest that lack of online presence is not the root cause of the problem. Rather, the success of the big supermarkets in affluent times has led them to become greedy and bloated, and shoppers have rumbled them, finding that it is possible to eat well but much more cheaply. Yes, maybe there are fewer varieties of extra virgin olive oil or exotic tomatoes in Aldi, but look at how much is saved on the grocery bill. The airline analogy is probably along the lines of yes, I’ll get a meal on the flight and carry on a bigger bag, but it will cost me twice the price of a Ryanair ticket.

Online growth is slowing. From annual increases of 20% per annum or so, growth has now slowed to 12% (ONS). Sainsbury a couple of weeks ago reported annual growth of just 11%, and Tesco did not mention it at all which they would have done if the news was good. On line still represents just 3.7% of all food sales.

Where does the consumer stand in all this. No research has been published investigating a straight trade off between low prices and an enhanced online experience.

We do know is that consumer confidence is growing. The number of people who feel that they will be worse off in the next twelve months has dropped from 42% in May 2013 to 32% today. (IGD)We also know that people are expecting food prices to stabilise, possibly because of the publicity given to supermarket price drops. However, 55% of people still say that the amount of money spent on food is a very important factor.

There will be no let up in the price battle, and it has to be funded from somewhere. A huge hit to profit will not be acceptable to investors. Suppliers will of course feel the cosh.

But only a thorough re-evaluation of the major supermarket business model will address the challenge of new models now competing for the consumer grocery pound.

Convenience Stores Flourish as Consumer Behaviour Changes and Competition Increases

Not so long ago the bells were tolling to mark the death of the corner shop. Fine perhaps for papers chocolate and cigarettes, or for a pint of milk in extremis, but for quality and choice the only answer was a trip to the nearest big superstore. And so corner shop turnover dwindled to a level where many businesses could not make enough money to survive.

How times change. Pressures on the family budget and high petrol prices meant that going miles to a store and spending money on things that were not really needed or worse would end up in the bin suddenly seemed less attractive. How much more sensible to nip down to the local shop and buy just the essentials.

The change in behaviour on its own would not have accounted for the rise in convenience shopping. Enter the cut down versions of major supermarkets with a well thought through range offering the quality and freshness found in a larger store, and in a more attractive and hygienic environment (mostly).

Tesco Expresses and Sainsbury Locals sprung up all over the place and critically forced independent small stores to look again at their offer and accept that they had to up their game to survive.

Today, according to the Institute of Grocery Distribution, overall convenience store numbers are up by 1.3%, and whilst major supermarkets are still the driving force behind increased shop numbers, there are far fewer independents closing down. Convenience multiples like Tesco and Sainsbury still only account for 1 in 10 convenience stores, and nearly two thirds are either independents or affiliated to companies like Spar and Londis. (The rest are garage forecourts and Cooperatives).

The independents could do more to boost business. Although accounting for 1 in 10 stores, the big companies take £1 in every £5 spent so they are doing a better job in persuading people to visit them and spend more heavily.

Of course the independent seeking to grow must have the basics in place - cleanliness, freshness and a friendly face. The opportunity to build more business seems to lie in matching products in store to the needs of the type of customer who visits. “Tailored solutions” is the mantra, and  IGD cites as an example the Cooperative in Old Street London which is divided up into “Food for now”, “Food for later” and “Food for Tonight”.

What is heartening about the resurgence of the corner store is that demise is not inevitable, and those who understand their customers and see competition as a stimulus not a threat, stand a good chance of success.

Plummeting Cattle Farmgate Prices - What Can Producers Do?

Cattle farmgate prices are going from bad to worse. Supplies are plentiful and demand is low.

The strong pound means that imports are a cheap buy, and imports in March grew by 22%. Imports of frozen beef were up by 46%. More animals are coming forward for slaughter, and carcasses weigh an average of 8kg more than last year so the volume of beef production grew by 6.5% in March. On the demand side, consumers bought 4% less beef in the 12 weeks to April 27^th because the retail price has been hiked up by 8%.

The response from the meat industry could be summarised as kicking the problem into the long grass. Eblex say that everything will be fine in the long term. Hybu Cig Cymru’s answer is to launch a review, NFU Scotland have arranged a meeting with the Scottish Association of Meat Wholesalers. The British Meat Processors Association has called for a long term vision for the supply chain, and meanwhile advises producers to get their costs down to better compete with imports.

The major retailers, who are ultimately responsible for the problem, having put their retail prices up as their costs have gone down, have as ever sheltered behind the British Retail Consortium who came up with the feeble response that retailers are using increased margins to ensure the sustainability of supply chains.

So what can producers do?  One school of thought says that ups and downs in pricing are part and parcel of beef production and the storm will pass. At the other extreme Farmers for Action feel that militancy might help and are planning to protest at a meat processor plant in the next few days.

A close eye must indeed be kept on costs. But to suggest as the BMPA does that costs should be kept down in order to keep prices down and imports at bay will not solve the problem. It is currency values which dictate the ebb and flow of imports – a strong pound means more imports.

Bashing the processors will not help either. Few processors are going to risk alienating the retailers they supply, no matter how much a retailer policy is hurting them.

The only section of the whole supply chain that retailers listen to are their customers, and sadly most customers are not so overwhelmingly convinced about the superiority of British beef that they will vote with their feet and go to another store or seek out the store manager and complain about foreign beef on the shelves. Yes, they say they like to buy British, but how many actively seek it out, or understand what information on the label tells them it is British.

British beef needs to be built into a strong brand, one that consumers feel they must seek out, and if necessary pay a bit more for because it is worth it.

Easy to say of course. Building a brand takes time, money and talented marketing people who can identify what is special about British beef, and communicate it in a compelling way.

It may be that the brand does not attempt to promote all British beef but segments of it. Ladies in Beef are keen to build a suckler beef brand. Many have suggested the idea of branding grass fed beef because of its higher essential fatty acid content. Branding is possible in beef, and has already been done with breeds. Waitrose promote Aberdeen Angus and Hereford beef, and Morrison’s support Shorthorn.

What is clear is that floating vague ideas will not work. Building brands is hard graft, and whether the consumer message is about grass fed, or suckler beef or something else, someone has to sit down, roll up their shirt sleeves, and work out what it is that will appeal to and motivate the general public.

And here is where producers could use their clout and lobby the many bodies who represent them, and are often funded by them, to start thinking about adding value to beef.

EBLEX, HCC, QMS, the NFU, the NBA, the Red Tractor people, the BMPA, breed societies, and the retailers who run producer groups all claim to support beef producers. Surely between all these bodies there is enough money in the system to support a brand building exercise, and somewhere a champion with the will to knock heads together and find a positive way forward.