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.
