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 passés. 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.

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.

Small Stores Rise Again

What goes around comes around.

How true that is for small stores. Having reached endangered species status the wheels have turned and now buying food in small local stores, usually styled “convenience” or C-store shopping, is forecast to be one of the fastest growing sectors of the market. IGD (Institute of Grocery Distribution) says that the convenience sector will grow by over £10bn to reach £46.2bn by 2018.

Consumers are buying more food locally to cut down on fuel costs, to help budgeting because they are less tempted to spend on stuff they either don’t need or which is likely to have passed its sell by date before they get round to eating the product, and to save time. According to IGD 85% of consumers visited a convenience store in the last month, and in August 2013, 9% of people did their main shop at a convenience store.

All the big retailers have jumped on the bandwagon. Even Aldi who have hitherto resolutely stated that they will focus only on on their traditional supermarkets, are trialling a convenience store in West London.

It is not just the big supermarkets who are developing strategies for convenience stores. Costcutter offers 3 different models of small store shopping – good, better and best – and shop owners can choose the model which best suits their local customers.

The keys to successful convenience store management start as ever with the needs of the shopper. In the past these needs may have been limited to topping up on staples like bread, milk and eggs, and buying a daily paper, bar of chocolate or cigarettes. The game is changing now, and whilst many will still visit the store for these items, shoppers say that they would like more fresh food counters, fresh food available at the front of the store, and fresh food grouped together.

Fresh and local is a powerful selling message. Smaller stores whose customers like the idea of supporting their local farmer or grower can grasp an edge over the bigger players by stocking local goods and displaying them with a strong message about the individuals who produce the food.

The knowledge that small store operators can develop about their customers, many of whom are regulars, means that they can tailor their offer specifically for them. An example quoted by IGD is that a store sited near to a railway station could offer food for commuters to eat on their journey to work, and ensure that they have ingredients available so that those same travellers on the way home can buy all that is necessary to prepare an evening meal.

There will be many other entrepreneurial ideas that smaller retailers can embrace and profit from. The very good news is that shoppers are looking for first class convenience stores and will support those who cater for what they want.