OnlIne Grocery Retailing and the Hunt for Growth

The biggest challenge for grocery retailers today, regardless of size, is how to get volume growth. Since the start of the recession any sales growth has come from inflation, not from volume. The actual amount of food we buy is still shrinking, and retailers are keen to encourage us to buy more.

So it is easy to understand the fascination that online retailing holds for those involved in the grocery industry. IGD (Institute of Grocery Distribution) has just published its forecasts for growth until 2018, and they predict that online will be the fastest growing sales channel, doubling in size over the next 5 years, up from £6.5bn today to £14.6 bn.

As a percentage though, online will still be small – just 7% of a projected £206bn industry. And it has been well recorded that it’s profitability is considerably less than that for selling through a traditional store.

So why the headlong rush?

There may be a human element at play. Not only is online fast growing, it is a glamorous channel – all that new technology, all those apps to play with, all those fancy smart phones to work with. Much more exciting than getting the shirtsleeves rolled up and working out how to inject life into a standard supermarket.

But getting back to the facts, it is perhaps best to view online growth in absolute rather than percentage terms. Projected cash growth by 2018 is £8bn. Assuming that all the major retailers get a share of this growth to match their current market share, then Tesco would benefit from 30% of the incremental cash or £2.4bn, Morrisons would take £.9bn and Sainsbury £1.4bn. These are huge numbers and go some way to explaining the effort (and investment) being put into the channel. To this should be added the certainty that people are increasingly living their lives through smart phones and tablet computers and to ignore this may mean a substantial loss of market share.

The challenge therefore is as much about how to make profit as how to get growth and there are signs that supermarket minds are starting to address the issue.

Walmart puts it succinctly. The conditions which make online work are “market density” (lots of customers in a small area), “basket density” (each order has to be high value), and “route density” (every truck needs to go out fully loaded).

Dutch company Ahold has decided that click and collect is a better way forward than home delivery, and is investing in pick up points and secure lockers.

An IGD survey of UK retailers put developing tools to understand the financial implications of online as number 5 on their “to do” list.

 A small business which does not have luxury of massive scale and matching mountains of cash to experiment with online should remember that traditional grocery purchase will still account for 93% of sales.Smaller retailers will continue to prosper provided they understand what their shoppers want, and make the instore experience inviting. It would not though be sensible to ignore technology developments, and at the least these businesses should be interacting with their customers via tablets, smart phones and the web. They will also need to keep a watchful eye on developments, and be ready to consider ways of retailing on line that add to sales but minimise hits to profitability. Suitable models will no doubt emerge as more businesses grapple with the online challenge. 

Cooperative Food - Struggling to Regain Lost Ground

It is not just the Coop’s banking arm that faces problems, food is struggling too albeit not on the same disastrous scale.

In the 6 months to July 26^th food sales were down 0.4%, despite food inflation running at well over 3%, and profits declined from £119m to £117m.  Market share is dropping, and Kantar Worldpanel figures for the latest twelve weeks show share at 6.6% compared with 6.8% in the previous year.

The performance is made more depressing by the fact that changing habits mean a boom in shopping in smaller local stores, territory on which the Coop has operated for decades.  Shoppers are weighing up the savings on time and petrol costs that shopping locally offers, and recognising that shopping only to buy what is needed for immediate consumption can help keep costs under control.

The Coop realises that it needs an overhaul.

It has recruited senior staff from Tesco, Asda, and Sainsbury, and drafted in the former  Morrisons finance director. Prices have been sharpened, and it is trying to improve its own brand quality. It is setting up farming groups to get closer to suppliers.

It acknowledges the rise of on line grocery shopping and recently announced that it is trialling four different ways of delivering an online service to its customers. In perhaps the most memorable quote yet made on the issues surrounding a move into online, Steve Murrells CEO said “Evidence shows it replaces bricks and mortar sales and is margin eroding. But if you are not prepared to eat your own children someone else might.”

Intensifying competition means that attention to price and quality alone is unlikely to be enough to generate growth.  All of the major supermarkets are going local. Sainsbury has announced that it plans to open 100 new convenience stores a year. Morrisons has got in on the act, albeit belatedly, and will have 100 M Local stores open by January 2014. Asda is using its Netto acquisition to experiment with different types of smaller store retailing, and Tesco just wants to be the biggest in every sector.

So now the Coop has to work out what it can offer that will persuade customers to walk past a local store from one of the “big four”, past a local operator such as Budgens, and choose to enter a Coop.

The Institute of Grocery Distribution offers helpful advice to smaller store owners. It boils down to having a deep understanding of why shoppers go to a particular local store. There are basic requirements of quality and value, but thereafter shopper needs can differ by customer age, whether or not they have children, age of children, type of locality, and time of day. One size is unlikely to fit all.

The Coop will need to be more analytical, flexible and faster to respond to shopper needs than it has been hitherto.

Building a Strong Brand - Why Sainsbury May Win the Branding War Despite the Advertising Standards Ruling in Tesco's Favour

The recent row between Tesco and Sainsbury has been characterised by many as just another skirmish in an ongoing war between the two companies.

It may turn out to be rather more fundamental than that.

The background is this. Tesco are guaranteeing that their own label prices will never be more expensive than their competitors, but Sainsbury protested to the Advertising Standards Authority saying that price is not everything and in doing comparisons Tesco needs to take into account other issues like animal welfare and responsible sourcing.  Tesco responded that the way food is produced is not a primary reason for purchase, and what matters to their customers is that they are getting the best deal possible.

The Authority found in favour of Tesco, ruling that Tesco had compared prices on the basis of products meeting the same need, and that food such as meat eggs or fish are interchangeable.

Sainsbury are incensed by the ruling, and by Tesco’s attitude. They are convinced that consumers care about where their food comes from, and that being on a budget should not mean sacrificing ethical considerations.

They have retaliated with an advertising campaign pointing out the ethical standards it applies to food sourcing, but which Tesco do not. An advert for bananas has the headline “Same price, different values” and points out that all Sainsbury’s bananas are Fairtrade but Tesco’s are not. A second advert with the same headline pictures two rolls both containing ham from each supermarket’s lowest price range, but pointing out that Sainsbury’s ham comes from British pork, whilst Tesco’s does not. Other advertisements show that the low price “Basics” tea from Sainsbury is Fairtrade, Basic eggs are from cage free hens, and Basics fish fingers come from Pollack a fish which is in plentiful supply.

What lies behind Sainsbury’s strong reaction is a realisation that building a distinctive brand which persuades shoppers to opt for a particular supermarket is more vital than ever in today’s low growth, budget conscious retailing climate.  Price as a differentiator is not the weapon it was, now that all the major supermarkets are committed to selling branded goods at the same price as competitors. And own label goods are increasingly price matched too. So the persuasive brand has to offer “price plus”. Sainsbury have chosen ethical sourcing as their point of difference. Other options could be superior quality or exemplary service.

Tesco by contrast seem not to have identified their point of difference. Worse, they continue to come across as arrogant. Their reaction to the ASA issue is dismissive of what consumers value, seeming to say that when on a budget nothing else matters apart from price. Which is not the case as the horsemeat scandal, in which Tesco was embroiled, amply demonstrates. Tesco have upset farmers too. As the NFU pointed out on behalf of British pig farmers, “comparing EU ham with ham produced in Britain is wrong, and misleading to consumers”.

In this altercation between the two companies, Sainsbury is the one projecting a strong brand image, which will stand them in good stead in the long run.

Consumer Opinion and its Influence on Monsanto and Arla Decisions

Last week Monsanto announced that it is stopping efforts to persuade the EU to allow Genetically Modified crops to be grown in Europe. And Arla announced that it is introducing its own farm assurance scheme because, they say, the Red Tractor no longer satisfies the needs of retailers or consumers. Both stories illustrate the importance of understanding consumers, and the impact they have on the business climate in which farming operates.

In the case of GM crops, those who supported their introduction failed to realise that there was no compelling reason for consumers to embrace the technology. GM was not going to make food cheaper, or more nutritious, health giving or delicious. This lack of a clear benefit means that whilst 13% of the population are strongly opposed to GM, and 3% strongly in favour, over 50% do not have a view either way, a figure that has remained the same for the last 10 years. (Source: IGD research). And such is the lack of interest or concern that, according to Food Standards Agency research undertaken last year, 76% of the population have never sought information on the topic, and 63% have never talked about it with anybody.

Add to this inertia the vocal lobbying done by anti GM campaigners, and the lurid stories put out by the tabloid press (example - the Daily Mail’s headline following Monsanto’s announcement was “Frankenstein food firm quits Europe”) then it is unsurprising that Monsanto felt it sensible to put their efforts elsewhere.

In the case of the Red Tractor, those in charge have failed to recognise that a growing number of consumers these days want more than bare minimum standards, particularly when it comes to animal health and welfare.

Whilst just 16% of people put animal welfare as a key driver of their food buying behaviour compared with 74% for price and value and 76% freshness and quality, almost 80% state that animal welfare matters to them. These numbers are sufficiently sizeable for retailers to take note and act. (Source: Labelling Matters Project by RSPCA, Soil Association, WorldSociety for the Protection of Animals, Compassion in World Farming).

The Red Tractor people are now starting to rethink their approach, and now seem prepared to move forward. Commenting on the Arla announcement the Red Tractor response was to say that they would work with Arla to ensure that the scheme meets the needs of buyers, consumers and farmers.

Farming faces a number of major issues as it strives to balance food production and environmental management, whilst remaining competitive in a global fight. Consumers will have a view on all of them, from TB management to large scale pig and dairy farms, crops for biofuels to animal cloning.

Farming leaders need to ensure that consumer opinion forms the backcloth to deciding the issues upon which the industry feels it must stand its ground.

Today's Top Priorities for Retailers and Their Suppliers

The IGD (Institute of Grocery Distribution) does an annual survey which looks at the areas where retailers and their suppliers are placing most of their effort. This year the top priorities are new products, deeper understanding of what goes through shoppers minds as they decide what to buy, and how best to manage the various channels through which they choose to buy whether online, or in convenience stores, discounters or the traditional supermarket.

The emphasis on shopper behaviour is not new. Continued pressure on finances means that consumers now have a very different mindset when it comes to shopping than they did when money was freer. They work to tight budgets, even to the extent of handing a product back to the cashier at the till if the bill goes over the amount they are prepared to pay. They look for money saving offers, meaning that over 40% of grocery items are bought on promotion. They compare prices on line before setting foot in a shop. Yet they are prepared to splash out on special occasions, or on top quality, as shown the 10% growth in sales of their premium “Taste the Difference” brand announced by Sainsbury a couple of weeks ago.

The emphasis on different channels is not new either. The efforts of Morrisons to get into convenience stores and online shopping are well documented, as is the contribution to growth made by these channels as well as discounters Aldi and Lidl.

The most interesting finding from the IGD’s research is resurgence of interest in new product development. The most likely reason for its move up the agenda is that overall the grocery market is showing little sign of growth, margins are under pressure because consumers are so cost conscious and retailers and suppliers are now very keen to find products which are sufficiently different and exciting to persuade shoppers to spend a little more than would otherwise have been the case.

For a new product to receive a favourable response from retailers it will need to be genuinely value adding. Not only will it need to be different from anything else currently available, it will need to chime with what consumers see as important, and will probably need to command a premium price.

New products can take several forms – the product itself could be innovative, the way it is grown or reared or processed could be new, or the format in which it is sold could be new.

New product development can be risky . What must not be underestimated is the time it takes to come up with something new,  the level of investment required in time and money, and the chance that after all that effort it does not work. Careful thought therefore needs to be put in to how to de-risk a venture.

But it is an exciting opportunity for the food industry. 

Retail Sales of Fairtrade Products Now £1.5bn. Is Success Due to Consumer Demand or Manufacturer and Retailer Push?

The issue of whether Fairtrade’s success is due to consumers or to manufacturers and retailers is worth some thought. All products should be traded in a way that provides a fair price for the farmer, whether that farmer resides in Ghana or Gloucestershire, Caracas or Cumbria and any learning that can make farmer returns fairer merits consideration.

A look at Fairtrade figures shows that 90% of the £1.5 billion retail turnover of Fairtrade products is accounted for by sugar, chocolate, coffee, tea and bananas, and by big food manufacturers and major supermarkets.  Every banana sold in Sainsbury's and Waitrose is Fairtrade, as is every bar of Cadbury’s Dairy Milk Chocolate, every bar of Nestle’s Kit Kat, and Mars Maltesers. All of Tate and Lyle’s sugar products are sold under the Fairtrade banner. All the big supermarkets have a range of Fairtrade teas and coffees.

 Indeed it is hard to avoid buying a Fairtrade product at some point in the weekly shop.

Not only have big companies pushed Fairtrade, they have done so in a way that requires little sacrifice on the part of the shopper, for no major player has added a price premium to their Fairtrade products, electing instead to sell at the same price as they did prior to adopting the logo.

There is a lesson here – big companies are prepared to swallow a hit to their margins if they see a benefit, and in Fairtrade they saw a way to polish their ethical credentials at relatively little cost.

Mostly therefore the success of Fairtrade has little to do with consumers demanding fairness for third world farmers. What the Fairtrade people have done well though is to build a recognisable brand with a simple message that appeals to consumers and allows them to feel good when they purchase a Fairtrade product. Ten years ago few had heard of Fairtrade, but now, according to the IGD, four out of five shoppers recognise the logo, and just over a third say they have specifically chosen to purchase a Fair Trade product

 And it is this undoubted consumer appeal that companies are harnessing when they adopt Fairtrade accreditation.

So what about fair trading for British farmers? The tide does seem to be turning. Scarred by the horsemeat scandal, and conscious that the British public views farmers and home produced food in an increasingly favourable light, manufacturers and retailers are slowly embracing closer, more transparent relationships with producers. This is vital for as the Fairtrade story shows, the lead has to come from players with clout and the ability to make big, transformational decisions.

The Fairtrade story also illustrates the value of strong branding, and here is where British farming could help itself and make a real difference to the way in which the industry is perceived by consumers and retailers alike. Replacing the Red Tractor with a recognised logo and brand which stood for exceptional production standards, not just the bare legal minimum would be a good start, as would tough policing of the standards.

The twin aims should be to move consumers from a vague feeling that they should be buying British into state of mind where they understand exactly why they should support British farming; and to build a system that retailers feel they must be part of to be credible with their customers.

A Look at Lidl - The "Other" Discount Store

Despite running more stores than fellow discounter Aldi, (nearly 600 versus Aldi’s 400)  Lidl remain smaller in market share, and have not managed to achieve Aldi rates of growth. In the last quarter Aldi’s market share was 3.6% and its sales grew 30% year on year. Lidl’s share was 3%, and it grew by 9%.

Why might there be this disparity in performance? I visited the Lidl store in Penicuik in the Scottish borders to find clues.

Both Aldi and Lidl sell products at prices far lower than available in mainstream supermarkets.( The dark chocolate pictured sells at 79p versus the branded equvalent at £1.85p).   Lidl follows many of the practices embraced by Aldi, designed to make the cost of operating the stores very low, and passing the benefits of the low cost base on to shoppers. Both sell a small range of products under brand names that few have heard of, many of which are imported. The small range means smaller stores which are cheaper to run. Products are displayed in their outer cases as opposed to being unpacked and placed on the shelf, saving staff costs. Costs are also saved by having fewer checkouts, and employing super fast till checkout operators. Both stores encourage those with alot of shopping to pack away from the till, again speeding up the process.

Lidl differs from Aldi in that it offers more big name brands and it is difficult to judge whether this deviation from the standard discount model results in increased sales by attracting shoppers who like to buy known brands or whether the added cost means that prices are possibly not quite as low as Aldi.

Lidl’s fresh food offer seems more attractive than Aldi’s. Many breads are baked on the premises, and attractively displayed in wicker baskets. Most of the meat on offer was produced in Scotland, well displayed in stand alone  chiller cabinets, and accompanied by an explanation of Lidl’s animal welfare standards. Some ham was imported but British product was available. Certainly the Scottish produced pork chops purchased at the Penicuik store were excellent.

The fruit and vegetables looked fresh enough, but do not display a sell by date (another cost saving action employed by both discounters as once a sell by date is reached product has to be sold at a heavy discount.) It was therefore disappointing that my Jersey Royal potatoes, albeit  costing 18p per kilo less that Sainsburys, had turned green by the day after purchase.

Overall though, the combination of availability of major brands and generally good quality fresh food made the  shopping experience in Lidl Penicuik  more like that in a major supermarket than does Aldi  and the company embraces more consumer trends like attention to animal welfare and supporting local produce.

So why would Lidl be growing more slowly than Aldi?

One answer could be that Aldi are opening more stores than Lidl.

It could be that prices are not as sharp, or product quality in general not as good. Aldi seems to do particularly well when it comes to food awards.

My guess is that Lidl’s marketing is not as good as Aldi’s.  Aldi generates more publicity in the papers than Lidl - it is always Aldi that journalists write about when doing a feature on discount stores.  And Aldi has promoted and advertised its products more heavily.

This could be why Lidl have embarked on two advertising campaigns, one talking about the quality of its fresh food, the other highlighting packaged products that consumers rate as highly as major brands, but which cost considerably less.

If Lidl wants to grow faster it needs to make sure its activities are squeaky clean.

Lidl, like Aldi, was caught up in the horsemeat scandal. There has been a recent allegation that Lidl only pays UK tax of around £12,000 on a business with a £3 billion turnover. Lidl of course claims that it complies completely with UK tax laws. Whilst unlikely to have impacted on sales growth to date, such an allegation will do little to enhance the company’s reputation. 

Which is unfortunate as it seems to have much to offer its customers, particularly in difficult economic times.