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