Thriftiness Now a Way of Life for Today's Food Shopper

Anyone who thought that shoppers would give up buying habits acquired during the recession may want to read the Waitrose Food and DrinkReport for 2014. Even those who visit this most upmarket of food retailers keep a close watch on what they spend. As Mark Price, Waitrose CEO says “Britain has become alot thriftier ...and that trend is here to stay”.

Budget consciousness, and its sister waste reduction are now ingrained across all ages and incomes. It means fewer trips to the supermarket, more buying only what is needed for that night’s evening meal, a constant eye on price, and more spending in discount stores like Aldi and Lidl.

Which  is not to say that consumers shun premium products buying only the cheapest, rather that in making a buying decision they want to be sure that they are not over paying, that the price charged is a fair reflection of quality, and that they could not buy similar products somewhere else more cheaply.

So we see that Sainsbury’s Taste the Difference premium range growing sales by 4% in the last 6 months when total sales were down 0.3% , and discounters cottoning on to the interest in premium products, offering expensive wines, lobster, free range Bronze turkeys, and luxury versions of standard favourites like puddings and mince pies. Waitrose’s own growth illustrates shopper willingness to buy the exotic, even if only occasionally, and the company says that 2015 will see further “premiumisation” with more luxury versions of standard foods like “uber special cupcakes”, new fancy doughnuts and ready to drink cocktails.

Amidst all the hype it is worth remembering that the vast majority of food spend goes on the basics - “sustenance and survival” in Waitrose’s words, and it is day to day expenditure that will receive greatest shopper scrutiny. The “Big 4” supermarkets have not fully recognised this, but are slowly seeing that budget consciousness is now a way of life for shoppers, and is here to stay. Asda has stated their commitment to closing the price gap with the discounters, and in a letter which will spoil Christmas for many, Tesco’s new CEO has indicated to his suppliers that as they are benefitting from falling commodity prices they may have to reduce their prices in January, as the company tries to compete against the discounters.

It is difficult to see anything but continued pressure on suppliers and ultimately primary producers, especially where products are heavily commodity reliant and have limited added value.

“A Market in Unprecedented Distress” – Says ASDA About the Grocery Trade

The words come from Andy Clarke, ASDA’s head man, as he reported like for like sales down 1.6% in the 13 weeks to end September, and thereby joined the other three major grocers in a club characterised by sliding sales and plummeting profits.

There is an air of helplessness coming from all four companies with much talk of shoppers changing the way they shop but little sign of game changing action. Yet the changes over which the grocers are wringing their hands have been evident for years. Who in the industry could have missed the rise of Aldi and Lidl, the trend towards convenience shopping and its knock on effect of buying fewer items, and the realisation by shoppers that with a little effort they can trim grocery bills. Arguably too, a return to more normal levels of food inflation was inevitable, and that relying on rising prices to keep sales and profits up was a risky strategy.

Grocers may have secretly thought that a better economy would encourage shoppers to return to pre recession buying behaviour, when little thought was given by many to the size of their grocery bill.

This has not happened. Whilst premium food sellers like Marks and Spencer and Waitrose may be doing better than most, and shoppers are still prepared to buy premium products like Sainsbury’s Taste the Difference which grew by 4% in the last 6 months, the overwhelming evidence is that shoppers are still very careful with their grocery spending.

The Institute of Grocery Distribution has found that the top three priorities of shoppers today are –

To save money on food and groceries (64%)

To reduce food waste (47%)

To stick to a budget (47%)

All the signs are that to remain competitive and hold on to their customers,  supermarkets will need to rebase prices to a significantly lower level than currently.  Asda has recognised this. As the CEO said “We have more to do on the discounters, but we continue to close the gap on price”. Sainsbury by contrast has not, offering only a £150m price reduction. Morrisons know that pricing is key, and suggested that they will reduce by £1billion. Tesco has yet to pronounce.

Tough times for retailers - very tough times for all players in the food chain from producers upwards.

Supermarket Price Promises – Mostly Smoke and Mirrors

Shoppers’ continued search for value, and the onslaught of discount grocers has led to the Big 4 supermarkets are tying themselves in knots trying to assure their shoppers that they offer the same prices as their competitors.

All claim that the shopper can be confident that their purchases will be no more expensive than if they had bought elsewhere, but close examination suggests that the initiatives being run by the supermarkets are mostly smoke and mirrors designed to give the illusion of value but in reality offering little of substance.

No store hands back hard cash if they are found to be more expensive. Instead Tesco, Sainsbury and Asda hand over vouchers and Morrisons has a complicated scheme where a card has to be obtained, points are added to the card when purchase at another store would have been cheaper, and the points are eventually traded in for a voucher. Voucher schemes benefit the supermarket because many will have been lost or forgotten about before they expire.

There are other wheezes designed to limit supermarket exposure. Sainsbury only compares with Asda, dropping the comparison with Tesco in a recent change designed to save money. Asda makes the shopper do the comparison work. It guarantees to be 10% cheaper than the other three major supermarkets but the shopper has to go online, enter till receipt details to find if their shop could have been cheaper elsewhere, and then claim their voucher.

There are a myriad of exclusions and exceptions to the various price promises. To be fair, Tesco’s Price Match covers all shops big and small, and fresh and own label products as well as branded. Morrisons compares with Lidl and Aldi as well as the majors across branded and own label. But Sainsbury does not offer its Brand Match in convenience stores, neither does Morrisons, and Sainsbury only compares branded prices.  All the supermarkets stipulate a minimum spend. No store gives out a voucher worth more than £10. Many everyday items are excluded such as baby formula.

There will be shoppers who have the time to go into the detail and work out how to make these pricing initiatives work in their favour. Many though will quickly conclude that the only thing that counts when shopping is the size of the bill week in and week out.

Which takes us back to Lidl and Aldi.

Despite the flurry of reduced prices and price promises among the “Big 4” both discount stores continue to flourish. Add to this Aldi’s recent commitment to keep the price differential between themselves and conventional supermarkets at a minimum of 15%, and it is difficult to see how the majors can hold their position without concrete and continued price reductions across their whole range of goods. So far, they are only playing at delivering competitive prices.

Looking at Online Grocery Shopping From the Supplier' Viewpoint

Life is not easy for suppliers selling their products through a supermarket’s online channel. The tried and tested tactics which work in the physical supermarket are of minimal use.

Online offers no opportunities for eye catching secondary displays designed to capture shopper attention should the brand be missed on shelf. There is no way to sample something new and delicious. Promotions which are visible when the shopper casts his or her eye along a 20 metre shelf are easily missed when confined to a screen measuring 15 inches x 6 or less.  The challenge is particularly acute for impulse products like confectionery, or soft drinks, lines which are probably not on the shopping list but are tempting when spied in store.

Whilst there may be some debate about how big the online channel might become, there is no doubt that it is more buoyant than traditional supermarket shopping, and suppliers are slowly waking up to the fact that this channel needs dedicated resources if they are to get the best out of it. 43% of major multinational suppliers interviewed by the IGD (Institute ofGrocery Distribution) have staff assigned to the online channel at least as part of their role. However just 24% have dedicated people to the channel on a full time basis, and only 10% have tailored the way they sell their products on line.

Without imagination and focus many suppliers resort to money off mechanics to promote their products, which can be expensive, and is at best a short term solution.

The key of course is to understand how shoppers approach online grocery buying and then work out how best to capture their attention. Research company Evolution has found that online shoppers tend to be very single minded and this not surprising given that the main reason to use online is to save time. Only 4% start their shop by browsing various categories, and just 1% start by looking for meal and recipe suggestions. 19% start with the special offers page (although 53% get round to it at some point). 25% shop by keyword (milk, eggs etc) and tend to work from a shopping list. Suppliers may want to explore opportunities on the “favourites” page. This is the first page visited by 44% of shoppers, and around 56% refer to this page at some stage during their shop.

It is becoming clear that a one size fits all approach is unlikely to work online, and that personalisation will become increasingly important. To get the best out of a marketing activity it must be relevant to the needs of individual shoppers, whether they might be one of the 35% who do their weekly shop online, or more likely, one of the 53% who only use online infrequently to do a big shop. Equally, there is little point in featuring a pet food initiative to a non pet owner, or a beer blitz to someone who only drinks wine and spirits. 

Having good shopper research data helps address the challenge of selling on line where space is limited and competition to get noticed is fierce.  It is also critical when negotiating with retailers who will have the last say about the strength, depth and promotional support demanded to feature a particular supplier’s products. 

Discount Grocers - Growing Now But Will it Last?

With Morrisons announcing a halving of their profits and a 7.4% like for like sales decline, and Waitrose facing profits down 9.4%, despite delivering a bit of growth (up 1.3% in like for like sales) it seems timely to examine reasons for the seemingly unstoppable rise of discount grocers.

New store openings are a big contributor to their growth. Aldi opened 42 stores in 2013, and will add a further 54 new stores this year.

Another key factor is their ever-widening appeal. Discount grocers can no longer be seen as a specialised shopping experience favoured by the financially hard pressed. Recent IGD (Institute of Grocery Distribution) data suggests that 26% of shoppers visiting discount grocers fall into the affluent AB category compared with 27% for traditional supermarkets. Conversely 26% of DE shoppers visit discounters compared with 25% visiting supermarkets. In August 2014, 54% of all shoppers in the UK claimed to have  visited a discount store in the past month, up from 45% in August 2013, and the average spend per visit has increased by 15%.

Despite the growth, discounters rely heavily on top up shopping. They have not captured a big share of the main grocery shop. Just 15% say that a discounter is their main store. If discounters want to continue growing they need to get more shoppers spending more per visit.

In theory they seem ready and willing to do so. A third of them agree strongly that they would use discounters more if they could get their main shop there.

But before they make an Aldi or Lidl a main shop, customers want to see more products. They want more fruit and veg , and they want to buy food for their evening meal. They want to be able to buy products for special occasions, and they want a range of staples.

So basically what they are asking for is supermarket variety at discounter prices. That is a challenge for discounters as they try to fit customer demand for more products into a business model which until now has relied on a small, high volume range manufactured at rock bottom prices. Discounters also need to address the march of technology. They are a long way behind mainstream grocers in producing smartphone and tablet friendly apps designed to make shopping quicker and easier.

It is probably safe to predict further years of fast growth. Aldi is committed to a near doubling of stores by 2021, up from the current 531 to 1000. The number of shoppers visiting a discounter will rise from the current 54%, and the emergence of Netto as a Sainsbury partner will mean even more opportunities for shoppers to visit a discount store.

Thereafter the going might get tougher as mainstream grocers start fighting back with competitive pricing strategies, intelligent use of variety and choice, and customer friendly technology.

How do Mainstream Grocers Deal With the Quagmire of Low Market Growth, Rampant Discounters and Budget Minded Shoppers?

Food sales in the 12 weeks to 20^th July grew attheir slowest rate for 10 years, up just 0.9% in value. 

Despite the uptick in the economy, and in consumer confidence, people are reluctant to give up their thrifty food buying habits acquired during the depths of the recession. They are helped of course by being able to shop at discount supermarkets. Aldi and Lidl have raised their quality game, kept rock bottom prices, and been rewarded with rocketing growth rates.

What then is the best way to deal with lacklustre growth rates, budget conscious consumers and rampant discounters?

Suggested action is falling into two camps. One says that mainstream grocers must reduce their prices by meaningful amounts, and soon. The other says go where the growth is and invest in online grocery shopping and convenience stores.

The IGD continues to back its online growth forecasts saying that sales will more than double in 5 years.  It points out that online grocery shopping is still in its infancy. Just 27% of shoppers use on line, and only 10% do their major shop online. The IGD reckons that the convenience of shopping online, providing as it does the ability to shop anytime, anywhere, combined with new initiatives being developed by retailers, and the added ease provided by mobile technology, means that more and more shoppers will gravitate to online buying.

Certainly some retailer initiatives look attractive. The boom in click and collect outlets avoids the need to wait in at home for the order to arrive, and even at home it is possible to select one hour slots leaving the rest of the day free. Retailers are also working on apps to make shopping easier. Instead of trawling through every category, Ocado’s app provides personalised guides to what is usually bought, what was bought last time, and ready prepared lists of what might be needed. Ocado is a leader in mobile shopping and says that 45% of its shoppers check out on a mobile gadget.

Retailers are also working on the opportunity to build volume over and above a standard shop by linking products in a way that is not possible in store – pizza and beer for example.

IGD points out that further growth will come from the advent of new players like Morrisons, the Coop, and Iceland who are all testing online shopping methods.

The above initiatives should encourage more online shopping, but there are two snags. First they are a double hit financially being costly in terms of investment and considerably less profitable than regular in store shopping. And second, they do not solve the knotty problem of uncompetitive pricing compared with the discounters.

Sainsbury’s tie up with discounter Netto starts to address the pricing issue, and there is a suggestion that Tesco could manage its stores like it does its product range, with three tiers of shops – value, to provide rock bottom prices, middle, and Finest as a Waitrose look alike to keep the profit margins up.

It is difficult to see how mainstream supermarkets will be able to afford a big drop in prices and the huge investment in online without radical restructuring, a dip in profits, and the usual squeeze on suppliers.

Competitive pricing has to be the priority, and with it an acceptance that online may not grow as fast as many predict. 

NSA Vision for Sheep Farming Says Domestic Market Growth is Vital - But Who Will Lead the Charge?

The National Sheep Association/NFU’s recently published vision for UK sheep farming identifies domestic market growth as critical to a healthy future.

Quite right too. The Vision paper says that domestic lamb consumption has plummeted by nearly two thirds since 1990, and that relying on a buoyant export market, dependent as it is on currency values, will not save us.

What is required, says the paper, is that “we” have to persuade UK consumers, particularly younger ones, that lamb is a tasty nutritious source of food. They suggest that innovative cuts, more branding, and new products will help. (More ready meals would be good too as lamb is woefully underrepresented in this huge, fast growing and youth appealing market segment.)

Th paper also points out that price is key. It is no accident that after years of decline the volume of lamb bought from supermarkets grew by 14% in 2013 due to an average 5% drop in price.  But prices are volatile, retailers are fickle, and the price of lamb could accelerate once again.

Lower prices if achievable, and new brands and products will help, but they will not be enough, and the Vision paper ducks two major challenges.

 For starters, who are the “we” who will lead the charge to grow the domestic market? Who precisely is accountable for growing an industry? Is it the Association, the NFU, retailers, processors, levy bodies, or perhaps farmers? Unless there is clear accountability for setting and delivering the growth agenda then nothing will happen and this critical contributor to achieving the Vision will drown in a sea of many words, much opinion, but little action.

The second challenge is what should be done.

The investigation needs to go deeper than price reductions and innovation. Whoever is going to lead the industry growth charge needs address the biggest problem with lamb, and that is fattiness. According to work done by EBLEX, 57% of people say that lamb tends to be fatty compared with 28% for beef, and that number may well be higher among the young.

All players in the food chain have a role to play in understanding what makes lamb fatty, and then working to address the problem.

Why, for example, does New Zealand lamb as presented in the shops contain around half the fat of British lamb. Is it the NZ lamb diet, or overly fat lambs being so heavily penalised that the farmer will not submit them to the NZ abattoir, or perhaps carcasses arrive in the UK with much of the fat trimmed off.

Processors and retailers need to be much stricter about removing excess fat from the product. Consumers buy with their eyes and will shun a product where they can see superfluous fat, or even worse buy and once home realise that much of the product will be consigned to the bin. It is flabbergasting to note from Tesco’s website that they quote fat content as bought, and then with the fat cut off by the consumer. Why should the consumer have to pay for something they will not eat!

Thirdly, more attention needs to be paid to offering lower fat alternatives just as they do in the beef market where it is possible to buy mince with fat levels ranging from 5% to 20%.

The NSA and the Vision paper’s co authors the NFU are confident that sheep farming can expand, but without a clear champion focused on understanding and delivering what the consumer wants domestic sales will continue to drift downwards, taking the livelihoods of many in the sheep meat food chain with it.

FarmDrop - The Online version of a Farmer's Market. Will it work?

 FarmDrop aims to connect producers and consumers using all the latest  online retailing ideas. It is a digital version of the traditional stall found at farmers’ markets, and has been set up by Ben Pugh a former city worker, and Ben Patten. Currently the business is trying to raise £400,000 through a crowd funding initiative, and has already received £301,000 in pledges from 105 investors.

Is FarmDrop a good investment? Will it, as the two Bens hope, turn out to be “the food system of the future”.

At first blush it all looks very simple. Consumers sign up to their local FarmDrop, order their goods on line, and pick them up at a fixed central point on the same day every week.

Producers fulfil the orders and deliver them to the central point.

And a “Keeper” mans the pick up point, ensuring that customers are given their goods.

Money wise, producers receive 80% of the retail price, the Keeper 10% and the brains behind the idea also get 10%.

At present there are 17 Drops either open or in development.

The FarmDrop website summarises the benefits of the idea as follows:

Consumers receive local produce, and the satisfaction of knowing they are supporting farmers. Keepers also support farmers and earn money in the process. Producers receive the lion’s share of the retail price.

The business model raises some issues. Its definition of local is broad with producers needing to be within 100 mile radius of the central point. Some might feel that this is not very local at all. Wholesalers can be used, which adds a further layer of complication, and is at odds with the idea of wholeheartedly supporting producers.

The biggest issue is that FarmDrop has underestimated the pivotal role of the Keeper without whom the idea collapses. The Keeper is charged with signing up producers to support the Drop, recruiting the customers, and troubleshooting any problems that might emerge either from producers or customers. Their financial return from putting in all this effort is modest. The example quoted by the operation says that keepers could earn £640 per month for 7 hours work a week, 5 hours manning the drop and 2 hours on admin. That comes out at £23 per hour and takes no account of the time, petrol, or telephone costs spent setting up the drop, enrolling producers, and signing up customers, work which is likely to be ongoing as some customers and producers will inevitably drop out of the system and need to be replaced.

The return to the operators of the business is the same as the Keeper’s but their involvement seems to be limited to setting up the website, and doing some training. The founders assert that “we stand for fairness”. The allocation of reward for the hard pressed Keeper does not sound at all fair.

It would be good if FarmDrop could reassess the way the model works, for a successful method of enabling producers to reduce reliance on supermarkets is to be welcomed.

Unless they address either the load being put on the Keeper’s shoulders, or increase the financial return the Keeper receives, FarmDrop will  remain a very small business, and investors will be disappointed.

Not Only Consumers Love Aldi and Lidl - Suppliers Do Too

You might think that discounter retail prices are so low that suppliers’ profits from serving them are thin to the point of non existent.

Not so. Yes it is true that Aldi and Lidl negotiate hard, and a recent article in the Financial Times suggests that margins are of the order of 5-10% lower than for traditional supermarkets. But the discount model means that there are many upsides.

The keys are the limited range of products on offer and selling at the same price every day. Aldi and Lidl stock around 3,000 lines compared with a standard supermarket range of 40,000-50,000. This means that suppliers can manufacture long runs of product instead of incurring cost by stopping the line to change to another variant. Everyday low pricing means that volumes are consistent and easier to forecast, as opposed to volatile and unpredictable, which is the case when goods are sold on promotion. Because there are few promotions there are few demands for add ons like promotional support. And listing fees seem to be a rarity.

Aldi and Lidl tend to be loyal to their suppliers and the narrow range and everyday price mean that suppliers need fewer people to manage the account, and waste little time in meetings.

Discounters operate efficiently and this philosophy benefits suppliers. No costly chopping and changing in manufacturing, no cash draining peaks and troughs in volumes, no wild and expensive ideas about promotions, no rug pulling at the last minute when an activity seems to have been agreed, and minimum numbers of meetings – it all adds up to a financially beneficial relationship.

Add to that the enormous growth potential that discounters offer, and it becomes clear why suppliers find that dealing with the likes of Aldi and Lidl a satisfactory experience.

  

Online Grocery Shopping - Being Realistic About Growth Prospects

The Institute of Grocery Distribution has just updated its 5year growth forecast for the UK grocery market., and predicts a slower rate of growth than in the last 5 years, down from 19.5% to 16.3%.

It remains, though, exceedingly bullish about the prospects for online, convinced that sales will more than double by 2019, an average increase of nearly 18% per annum.

What will power this growth, they say, is the roll out of grocery click and collect to more locations, greater competition to raise standards since Morrisons entry ( a tribute to the strategy that Morrisons have adopted), lower delivery charges, and more delivery subscription schemes.

The projections seem optimistic.

For starters, growth rates in online grocery shopping are falling. Ocado, which is an online only retailer reported growth slowing from plus 18% in the first quarter to plus 12.6% in the second. They also reported a modest reduction in the value of an average order, down from £117.99 to £117.53. Sainsbury’s online sales growth has dropped to 10% in the last quarter. Tesco’s Philip Clarke indicated at a recent conference that their online sales at Christmas were growing at around 10%.

Secondly, the projection seems to ignore the various forms of competition that online faces.

There is internal competition as parent supermarkets invest in making their bricks and mortar stores more attractive places to shop.

There is competition from discounters who continue to see growth accelerate, and who, if they can pull off the trick of offering ever more up market food with rock bottom prices may exceed the near doubling of sales forecasted by IGD.

And the trend towards convenience store shopping shows no signs of stopping.

Thus the shopper is being offered an ever more attractive selection of ways to buy their groceries.

As they ponder the best way of feeding themselves and their family they will be working out what best suits them at a particular time. It may be they want to browse the shelves in a supermarket and see immediately the quality of what they want to buy. It could be that they want the lowest price possible, or maybe a trip to the local convenience store for speed. Or it could be that tapping a shopping list into their smart phone is the easiest way to shop.

In this increasingly multi channel world, online shopping can only grow at the high rates projected if the numbers of people shopping that way doubles (and they spend roughly what is being spent now), or the same number shop online as now and double their spend, or some combination of both. All of which looks stretching.

This is not to suggest that offering shoppers the opportunity to shop on line is a waste of time, for clearly it has its attractions.

Rather it is to suggest that any forward projections, particularly if they involve heavy financial investment, should take a realistic view of likely sales growth.

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.

Why Shoppers Like Aldi's Pricing Strategy

There is no stopping Aldi – or fellow discounter Lidl.  Sales in Aldi grew by 36% in the last twelve weeks, and those in Lidl by 20%. And this in a market which grew by just 1.9%, the lowest level for 11 years (Kantar Worldpanel).

We know that shoppers like the discounters’ low prices, but they also like the way they price.

To get value in the “big 4” supermarkets shoppers have to buy what’s on promotion. Often the products on offer are not the ones that they want, or the offer is not in a form that they want. Multi buys like buy 3 get one free, or get the second half price are particularly disliked by shoppers. Fine if the product in question is not perishable and likely to end up in the bin, or if it is something that is regularly bought, but too often that is not the case.

Kantar tells us that 45% of all sales made by the major supermarkets come from promotional offers, up from around 40%. Compare that with Aldi where just 3% of sales are on promotion.

So there is the draw for Aldi customers. Having worked out which products they like they can shop with confidence knowing that the price will be the same day in and day out. Contrast that with other grocers where prices can be hiked for a while just to be able to drop them later, and shoppers are never sure what might be available on promotion on a particular day.

Morrisons, Asda, and Tesco have cottoned on to this, and permanently (they claim) lowered prices.

While price is the main reason to go to discounters, the IGD has done some research on what other aspects shoppers find attractive. Some are surprised by the quality, some like the speed and ease of shopping, and the reduced range, others enjoy finding continental brands that are not available elsewhere. As the IGD says, discounters are moving mainstream. 51% of people have shopped in one in the last month, compared with 41% two years ago and 12% are saying that their main store is a discounter, up from 5%. Hence the worry among traditional grocers and the change in pricing strategy.

Plummeting Farmgate Prices for Beef Cattle – Could This Have Been Foreseen?

The farmgate price paid for finished cattle has fallen from £3.85p a kilo in January to £3.55p a kilo at the end of April, and it is causing anxiety among beef producers.

EBLEX has traced the problem to reduced consumer demand, in turn caused by a rise in retail prices, and to a small rise in finished stock brought forward for sale.

It is worth digging a bit deeper. Why would major retailers want to put the price of beef up at a time when consumers are budget conscious and the likes of Aldi and Lidl with their low prices are stealing customers. Why not take advantage of plentiful supply and promote beef to raise sales and become more competitive?

This seemingly odd behaviour from retailers is likely to be part of a long term plan.

For months now, retailers have been watching the rise of the discounters and its effect on their own sales They will have noted in particular the disastrous decline in Morrisons sales, know that Morrisons have to do something radical to stem the decline, and will have been bracing themselves for a price war.

Price wars are expensive, and have a severe impact on profits. No one wins because all the retailers follow each other’s pricing policies, and engage in a futile race to the bottom. So they want to cushion the impact by building a war chest, and one way to do this is to stealthily raise prices where they can, pocketing the increased cash as an insurance against the evil day when the price war starting gun is fired.

The beef market is an ideal candidate for such a strategy. Valued at over £2billion pounds, the money raised from a retail price increase will far outweigh the loss in sales that might result.

Morrisons announced in March that they will be dropping prices, and now the promise has become a reality. One of the biggest price drops announced is on minced beef where a 500g pack will be reduced by 20%.

Mince is a staple, a “known value item”. It accounts for over half of beef sales. Other retailers will follow suit. Consumer demand will pick up. Unless stock available for sale increases dramatically, equilibrium should be restored, and farmgate prices should rise.

And there’s the rub. Beef farmgate pricing is at the mercy of supply and demand. If demand rises, and supply is constrained, prices rise – as they did to over £4.00 a kilo at the time of the horsegate scandal. A couple of years ago, when there was a surge of supply of dairy beef, farmgate prices fell.

We are told that rising world demand for meat means a bright future for farmers. One can only hope so. But there is no sign of accelerating demand yet. Meanwhile, British beef farmers will be at the mercy of short term factors. Some of these are predictable, and bodies such as EBLEX could support producers by being better in tune with market factors.

But there is no silver bullet, and planning beef production where the lead time from putting the bull out to selling the finished article is at least two years is uniquely tricky.

The Nightmare Scenario - Could Morrisons be Broken up and Sold Off, Leaving Just Three Big Supermarkets?

It was just a small piece in the Times this morning but it should send a chill through every one who supplies supermarkets.

The piece suggested that troubled Morrisons was being closely examined by private equity firms with a view to being bought and broken up, thereby generating mountains of quick, easy cash.

The writer went on to say that Sainsbury would love to get their hands on the 100 convenience stores that Morrisons have developed, because it would help them better compete with Tesco, and that ASDA might like to buy the superstores.

It is just speculation of course. There would probably be competition issues, given that the combined share of Morrisons and ASDA would be around 27%.

But the thought of there being only three big players in the UK grocery marketplace is alarming to put it mildly. Pressure on suppliers is tough enough with 4 major companies vying for sales and profit.

And Morrisons, the latest decision to stock New Zealand lamb during the winter apart, is a strong supporter of British farming, especially livestock.  Speaking as a farmer supplier to Morrisons I can say that they are fair and efficient too.

Morrisons will survive if they concentrate on what made them successful in the first place - selling top quality fresh food at prices cheaper than the competition. They are uniquely placed to do this because they own their own abattoirs, fruit and veg packing houses, and  bakery. Their commitment to reducing prices by £1billion is a first step towards a recovery, but given that their competitors will follow them down in price, it is to be hoped that the cost benefit of vertical integration means that Morrisons ultimately will win a pricing war.

Less easy to call is whether their new emphasis on convenience and online shopping risks taking their eye off the main ball which is getting core customers back into the stores.

Anyway, such decisions are down to Dalton Phillips, the man in charge of Morrisons. Every supplier to supermarkets should be keeping everything crossed that he sorts out a recovery strategy soon, and sees off any attempt from private equity firms to buy the business.

The Increasingly Complex Consumer

It is becoming harder to work out what is going through the consumers mind as they do their food shopping.

On the one hand we could conclude that all roads lead to lower prices.

The growth of  discounters ALDI and Lidl with sales up 30% and 13% respectively versus prior year, has forced the big 4 retailers to re-evaluate their strategies. Morrisons who are the worst hit of all have led the way, declaring that they will drop prices by £1 billion over the next three years to help them compete. Where Morrisons led, others were swift to follow particularly Tesco and ASDA, the former also struggling to grow sales, and the latter keen to preserve their position of always being 10% cheaper. Indeed, like lemmings hurling themselves over the cliff, the race to the bottom has started with all the major retailers dropping the price of milk, bread and eggs.

 

It is not just the Aldi Lidl phenomenon that is leading to change. The last few years have seen the rise of the disciplined shopper who sticks rigorously to a pre-planned list. 48% did so in 2008, the figure is 67% in 2013.(Bord Bia) As a result, the amount that the shopper spends per trip has dropped. Retailers have responded with  heavy, value orientated promotions, but have not found the magic growth formula. Indeed, in the last 12 weeks, grocery growth was 2.2%, just 0.3% ahead of inflation.(Kantar worldpanel)

As to the future, work done by IGD suggests that consumer confidence is increasing, but feeling better is not encouraging people to slacken the purse strings. When asked about their priorities for 2014, 64% said it was about saving money, 47% wanted to reduce food waste to save money, and 47% were determined to stick to a budget.

So maybe the lemming rush to slash prices is indeed the right answer.

And yet.....

We hear that premium food ranges are growing faster than value ranges. Tesco’s Finest range is growing by 12%, and Sainsbury’s Taste the Difference by 9%. (Worldpanel/NFU conference)

Waitrose, not known for being cheap, is showing year on year growth and now has 5% of the total market, its highest ever share.

Sales of organic produce have returned to growth, up 2.8%.(Soil Association). Organic milk is enjoying a mini boom, up 9% in value and 7% in litres. (Dairycodatum).

RSPCA Freedom Food higher welfare products have been bought by 52% of shoppers.

So what are we to conclude?

First, the price issue cannot be ducked. Not only are consumers committed to finding low prices, they have, in their phones, tablets and computes an easy way of checking that they are indeed buying a particular item at the lowest price. However, with all the grocers selling products at the same price, it is becoming less of a reason to choose one store over another.

However, people are prepared to spend on what they value – that hard to define combination of what benefits a product offers and a feeling in the consumers mind that these benefits are worth paying for.

Knowing what the consumer wants and providing it effectively remains at the heart of a successful business strategy.

Coop Farms Deemed Non Core - A Strange Conclusion in a Food Business

How disappointing to hear that the Coop has decided to sell its 15 farms after owning them since 1896. As their web site says –“nothing makes better sense than for the Co-operative to produce our own food for our own stores.” And there will have been many consumers who believed this and saw it as a reason to shop at the Coop.

Yet, dig a bit deeper and it is clear that the farms business, like every other aspect of the Coop has been run in an ad hoc, un-strategic and ultimately disastrous fashion.

It turns out that of the 49,000 acres under Coop management, just one third is owned, and the remainder is on let land or contract farming arrangements.

And, far from fulfilling the promise on the Coop website to use Coop produce in Coop stores, it turns out, according to Chief Executive Euan Sutherland, that only 2-3% of production goes to its own stores, mainly potatoes. Some 70% of production is in cereals, mostly sold to other companies.

Despite ownership of such vast quantities of land, the Coop farms none of its own livestock. It was in dairying but came out in 2003 to concentrate on arable products.

The trends towards buying local, worrying about provenance and buying British has been evident since the early 2000’s. The Coop was clearly aware of this, hence the blurb on the website, yet lacked the will or the sense to utilise their precious farming asset to take advantage of the trends. Indeed, the Coop could be accused of blatantly misleading consumers.

Anyway, the farms will go. Apparently they will raise about £140m which will help to pay down debt.

So what of the Coop food business now? It has been losing market share for years. The new head of food, ex Tesco executive Steve Murrells said in an interview last week “Our stores were, frankly, awful”. His answer is to streamline the range of goods offered, open more smaller stores to take advantage of the growth in convenience shopping, and test out selling online.

That will not in itself be enough to save the business. Tesco and Sainsbury have been investing in convenience and online for years, and Morrisons is running hard to catch up. The Coop has no obvious point of difference in their offer to attract consumers from the big players.

Yet in the farms it could have had a powerful differentiator. In today’s climate of increasing worry about where food comes from, animal welfare and ethical production considerations, what could be more compelling than knowing that the place you shop at has managed the production of the food it sells all the way from farm to shop shelf.

But of course it is too late now. It looks like the Coop is throwing away what could have been a competitive point of difference in an increasingly cut throat grocery world.

A Look Inside the Grocery Shopper's Head

According to researchers Kantar Worldpanel the average shopper spends around £3,800 per annum on groceries, and spends the equivalent of 16 working days in store. 

Unsurprisingly, given the time and money involved, shoppers are choosy about where they buy their groceries.

It is clear now that quality and value are non negotiable when it comes to shoppers deciding where to shop.

So if quality and value are a given, what else matters?

Kantar asked shoppers on a recent shopping trip in the Big 4* supermarkets which statement best described their mind set.

42% chose budget management, focussing on getting the items they wanted without spending too much. 25% chose time pressure, aiming to get in and out of the store as quickly as possible. 15% were happy to browse. Just 9% felt that searching for special offers was the best description of them on the trip in question.

However, Kantar have found that shoppers’ mind sets differ depending on the type of product being bought.

“Fast Find” covers pre planned purchases like bread and milk, and here the shopper’s main aim is to buy what they want without spending too much, and get in and out of the store in double quick time. They spend little time looking for special offers. Which does raise the question of why retailers feel the need to sell milk at silly prices as was the case a couple of years ago.

“Restock and save” items are less frequently bought products like tea, coffee or washing powder. Such products do not perish so this is the category where 39% of shoppers look hard for special offers. Again, a finding such as this makes one wonder why manufacturers run promotional deals such as BOGOFS – the sensible consumer does not buy any more over the long term, instead preferring to stock up until the next time the product in question is on promotion.

“Classic restock” covers items such as fruit juice and cereals, and health and diet considerations are second only to budget management.

In the “Meal solver” the shopper’s prime focus, outweighing even budgetary considerations, is to find convenient meal solutions. This suggests that the more help that  retailers can give about easy to prepare meal ideas the more likely a shopper is to return.

The final category is treat where shoppers buy on impulse and all other considerations come second.

Kantar’s key message from the research is that price and quality are a “must”, and now it is the shopping experience both within category and overall that matters to consumers. They say that whilst their research focuses on the Big 4, the findings are relevant to smaller shops.

*Big 4 supermarkets are ASDA, Morrisons, Tesco and Sainsbury

Rapid Changes in Meat Eating - All Down to Price and Horsegate.

 From BPEX and EBLEX comes interesting data about the nation’s meat eating trends. BPEX’s quarterly category report shows that fresh meat consumption in the year to mid October 2013 is down in tonnage by 2%, although up in value by 5%.

It is the differences in species consumption which are most fascinating, and they show that consumers are quick to change their buying patterns according to price.

For the first time for years the amount of fresh chicken eaten has gone down. The 3.5% drop is significant when considering that in the previous year consumption grew by 7%. The change is driven by prices which on average went up by almost 10%.

On the other side of the coin an average reduction in prices of 4% has seen lamb consumption grow by a whopping 12.5%. Again, this is a huge change in buying habits for the lamb market had been dropping year on year since 2008. BPEX tells us that pork, where volume sales have dropped by 4%, has been the biggest loser with leg and shoulder joint sales falling as consumers switch to lamb for their Sunday roast.

Over the same period beef consumption dropped by 1% as prices rose by an average of 6%.

 Horsegate fits into the picture because, EBLEX tells us, consumer concerns about exactly what it was they were eating drove retailers to buy more British produced meat. As a result supplies of beef, chicken and pork were tight and prices rose.

There are signs though that the pendulum may be swinging again. Stories are appearing about sizeable increases in imports of Polish and Irish beef, which if sold at a low enough price may trump shopper worries about how the meat was produced.

BPEX also publishes details of which supermarkets over or under trade in fresh meat relative to their market share for all groceries.

Tesco, ASDA, and the Coop under trade. Sainsbury, Waitrose, discounters ALDI and LIDL and beleaguered Morrison’s overtrade. Price alone is therefore not a guide to how well a supermarket might do on fresh meat sales. The overtraders are a mixture of the upmarket and pricey (Waitrose and Sainsbury) and the “noted for low prices” discounters and Morrisons. Conversely Asda and Tesco might be said to be operating at the lower end of the price spectrum yet under trade.

Doing well in meat demands a tricky balance of good value, good quality, provenance and trust. Get it wrong and shoppers will vote with their feet and take their meat buying elsewhere. The challenge is made more difficult by shoppers' increasing tendency to change their buying behaviour with lightning speed. 

Spotlight on Morrisons – Why is it Struggling and What Can be Done to Stop the Rot

Supermarkets, apart from ASDA, have now reported their Christmas trading results. “Patchy” might be a good description with Aldi, Lidl and Waitrose booming, Marks and Spencer doing well, but Tesco and Morrisons down on the previous year. Even Sainsbury only managed 0.2% growth.

It was Morrisons who shocked most with a 5.6% drop in sales versus the previous year, and this at a time when the economy is generally agreed to be picking up.

Their performance highlights both long and short term issues. Their long term problems are well documented. Until last week they had no online presence at a time when more consumers are turning to the internet for grocery shopping: and they have few convenience stores which puts them at a disadvantage as people move away from mid week top up shopping in bigger stores, preferring to avoid temptation and buy just the essentials at their local convenience store.

   

Yet, neither Aldi nor Lidl offer online, and have few convenience shops, and Tesco offers both but is struggling.

Morrisons problems must therefore be more deep rooted than lagging behind in two growth areas.

Perhaps their biggest issue is that shoppers cannot see a compelling reason to shop at Morrisons. They are uncompetitive on price versus the discounters, and lack the quality reputation of Waitrose or Sainsbury. This lack of clarity about what the brand stands for is obvious when viewing the Morrisons Christmas advert, where the four points made about Morrison’s offer (service, wide variety, having their own chefs and “putting on a show for little dough”) were eclipsed by the undoubted star quality of Ant and Dec. Four messages were three too many,  and money would have been better spent on articulating one reason to shop at Morrisons rather than waste hundreds of thousands on personalities who drown out the message.

So Morrisons must get back to its roots and the core values that made it into a success. The company will have reams of consumer research to guide them, but price and value for money are likely to figure strongly.

Morrisons are too small to be able to match the discounters on the price of packaged goods. Both Aldi and Lidl are huge internationally and can use their buying clout to keep prices rock bottom. Rather, Morrisons should be focussing on the one thing that all of their competitors will find difficult to match, which is that Morrisons, by owning their own abattoirs, bakeries and fresh fruit and veg packing houses can offer fresh food at unbeatable prices.

They need also to be true to their values. It did not receive much publicity but at the back end of 2012 they started to stock an imported red meat brand called Helmsley. This was followed in November 2013 by imported chicken. Such stepping away from their stated policy of selling only UK produced meat does little to boost consumer confidence, and is the sign of a muddled thinking business.

It is to be hoped that Morrisons swiftly get back on track. The supermarket sector needs competition. The more successful supermarkets there are to choose from

the better for all in the food chain.