Online Grocery Shopping - Lively but Challenging

Optimists viewing the online grocery sector would point to its growth and its ability to attract new entrants. They would say that participation is crucial when convenience is king, and anything can be purchased at the click of a button.

Growth projections remain high. IGD has published its latest forecasts, and whilst rowing back from previous projections of doubling in five years, it is still predicting a 68% growth in the 5 years to 2021 compared with 10% for the grocery trade as a whole. Mintel market researchers are even more bullish forecasting a 73% growth in 4 years.

The Amazon Fresh entry into online grocery has added to the excitement. The move is a further step in its quest to infiltrate every aspect of consumers’ lives and their latest foray shows how seriously they are taking the market, now offering fresh food alongside thousands of packaged grocery products.

But….

It is well known that profits from online grocery shopping are slim to non existent. Whilst this will not bother Amazon who famously have operated for 20 years on a model which more or less ignores its shareholders in favour of investing to expand faster, it is an issue for the major, publicly owned UK grocers, and for smaller retailers too.

Profits versus growth is a constant challenge. Tesco’s CEO Dave Lewis has stated an intent to focus more on profits than sales growth, and in a recent statement said that “online grocery growth continues to moderate”.

A greater focus on profit would suggest that the IGD and Mintel forecasts are still too optimistic. Tesco’s annual growth rates are around 8% -9% as are Sainsbury’s. Ocado, another company with a relaxed attitude to profitability, has seen growth rates moderate to around 13%. Still high, but possibly more to do with having just a 5% market share compared with Tesco at around 40% and Sainsbury at 17.5%.

Adding to the challenges, consumers do not seem to be rushing to embrace online. 20% of people claimed to shop online in 2010, but six years later this has only risen to 29%, despite the massive increase in use of smartphones and tablets whose ubiquity and convenience were supposed to transform shopping, allowing purchase any time anywhere. At least a quarter of the population have declared no interest at all in shopping online.

And the Amazon Fresh entry, at the moment certainly, does not look like a model for either massive growth or improved profits. So far, the Amazon offer does not appear to be much different from what is already available. It has made much of its one hour delivery slots, but Ocado offers this too. It may have an edge with its offering of local artisan foods, but this is unlikely to result in big volumes, and would pose a huge logistical problem once the company expands beyond central London postcodes.

The other show stopper is that Amazon delivers in cool bags rather than refrigerated vans. As a shopper I would be deeply worried about having my perishables delivered like this, wondering how long they had been in transit for, and how hot the van was.

The growth in online grocery shopping and the advent of more competitors means that retailers have to seriously consider an online option, otherwise they risk losing sales to competitors.

The key is to stick with cautious expectations on growth and profitability to avoid nasty shocks, and take a long term perspective.

The alternative is to stick resolutely to bricks and mortar, but ensure that what is offered is so different and exciting that shoppers will stay loyal despite any inconvenience.

Either way presents its challenges.

Big 4 Grocers Pricing Strategies - Who is Winning?

Latest Kantar worldpanel data for 12 weeks ending 22^nd May 2016 shows Tesco sales “stabilising”, Sainsbury falling and Asda falling disastrously.  Morrisons is difficult to read because of their store disposal programme.

Each has adopted a different pricing strategy in an effort to hang on to their customers and fight Aldi and Lidl, who are still showing double digit growth.

Tesco continues to promote with offers like buy x number for £y, and buy one get one free. It has rebranded its fresh product value lines, turning them into the “Farms” range, and calling them nice, rural British sounding names like Boswell Farm beef, and Woodside Farm pork products.

Questionable as this move may appear, given that these farms are entirely fictitious and the produce often comes from abroad, Dave Lewis the Tesco CEO has spent vast sums of money on developing the range and is convinced that it allows Tesco to compete with discounters but with consistent quality. So Tesco continues with a mix of pricing approaches, most notably continuing with heavy promotions.

Asda by contrast is totally committed to everyday low pricing (EDLP) with few or no special offers. They are convinced that this is what consumers want but their sales decline is accelerating with the latest 12 weeks data showing a drop of 5%.

Sainsbury also reckon that consumers do not want promotions, preferring instead to know that prices will be consistent week after week. Sainsbury are in the process of transition to their new EDLP strategy, but sales dropped by 1.5% in the recent 12 weeks.

Overall, it is a patchy picture, but the evidence so far suggests that abandoning promotions leads to a drop in sales.

The fact is that what consumers want and what they say they want are two totally different things. Any change in strategy, particularly in an area as sensitive as price demands a thorough understanding of consumer behaviour.

Making the right decision is made more challenging when a strategy plays into the hands of competitors. Both Aldi and Lidl follow an EDLP strategy, but the flaw in Asda’s approach is that they will never be as cheap as Aldi or Lidl, and adopting EDLP makes the price comparison totally transparent. Transparency is of course to be welcomed, but shoppers need to be offered something which in their mind offsets the price differential. It could superb quality, or a range more tailored to their needs than a discounter can offer.

And to the point that price is not everything, the Kantar data also tells us that Aldi’s premium own label brand Specially Select grew by 15%in the latest 12 weeks, and Lidl’s deluxe range has grown by 65%.

None of the pricing strategies adopted by the “Big 4” seem to be proving outright winners in the fierce competition to grow sales.

Price Still the Most Important Consideration for at Least 35% of Shoppers

From IGD comes research which groups shoppers by attitudes and behaviour rather than the more traditional demographic analysis of AB, C1 etc..

IGD have found 6 categories of shopper:

Brand purists (26%)
These shoppers are more brand loyal than the average shopper, and will plan their shopping in the knowledge that they will be able to find the brands they like.

Habitual loyalists (13%)
Like to plan their shopping, buy familiar products and stick with one or two stores rather than shop around. They tend to be older, with an average age of 59.

Savings seekers (18%)
This is the group that puts price ahead of all other considerations.

 Discounter enthusiasts (17%)
Like savings seekers this group is also concerned with how much they spend on food and groceries but are not willing to compromise on quality 

Technology adopters (16%)
These shoppers have the highest interest in using technology for food and grocery shopping and do more online shopping than the average to save their precious time. They tend to be younger, London based, and shop frequently.

Foodie adventurists (10%)
Are the most likely to cook from scratch, try new recipes, and to buy new products on impulse.

It is dangerous to be overly definitive when assessing how to make snapshot data like this actionable, and shoppers will fall into more than one box, but some points jump out.

First, it is perilous to underplay the importance of price.  At least 35% of shoppers (savings seekers and discounter enthusiasts) are very price conscious, and it would not be rash to suggest that a good proportion of those in the other boxes are price conscious too. Indeed it is striking that the IGD has not found a category that subordinates price in favour of some other attribute.

Aldi certainly feels that price remains critical. It announced yesterday that it intended to be "cheapest for ever" in Britain, and cut its prices on meat fruit and vegetables. Meanwhile Sainsbury announced that it was pulling away from multi-buy promotions in favour of everyday low prices.

Secondly, people remain very traditional in their food buying habits. Only 10% can be described as adventuresome compared with the 39% of brand purists and habitual loyalists who do not stray too far from the familiar.

Thirdly, the percentage of technology adopters is surprisingly small given all the hype we read about consumers supposedly turning in droves to shopping on smartphones and tablets. The number may explain why online grocery shopping  is not reaching the average 15% per annum growth rate some had predicted. Ocado, the dedicated online grocer, clocked up 13% growth in the most recent quarter, and Sainsbury just under 10%. Tesco stated that their growth over Christmas was around 5%. Tellingly, Dave Lewis, Tesco chief executive officer, said that the company was being “much more thoughtful about the economics of online versus the offer elsewhere in the estate.” , which suggests that Tesco does not intend to push for high online growth rates at the expense of profit.

Christmas Food Buying - Consumers Win but Supermarket Performance Patchy

Major supermarkets and research companies have now reported Christmas trading results.

We have learned that food deflation continues, and that, according to research agency Kantar World panel, groceries overall were 1.8% cheaper than in 2014, with the cost of Christmas dinner dropping by 2.2%. Nielsen, another research company reported that sales of meat fish and poultry were down by 3.8%.

Nielsen also reported that in the 4 weeks before Christmas, the proportion of sales bought on promotion dropped to 31%, the lowest for over 5 years.

Online grocery shopping grew over Christmas but not by much. Tesco reported sales growth of 5%, and Sainsbury !0%. Once again the numbers suggest that some forecasts of a doubling of online grocery sales by 2020 seem optimistic.

Seeing the wood for the trees when it comes to how well supermarkets did over Christmas can be tricky, and headlines can be misleading.

The main cause of confusion is the difference between total sales and “like for like” sales which strip out the impact of new store openings and closings, with the picture being further muddied by the different time periods each company chose to report on.

Kantar World panel for example quotes data for the 12 weeks to 3^rd January, and tells us that “Waitrose, the Coop and Sainsbury were the Christmas winners”. Yet, according to Waitrose’s own results,  like for like sales over Christmas were down 1.4%. Sainsbury did not disclose its Christmas trading, but stated that quarterly like for like sales were down 0.4%

By contrast, Morrisons like for like sales over Christmas were up by 0.2% which sounds miniscule but was celebrated for being the only sign of growth in the past 4 years. And Tesco’s like for like grew by 1.3% in the 9 weeks to January 9^th. Both recorded declines for the quarter due to store closings.

Aldi and Lidl grew by 13% and 18% respectively in the quarter, but according to some reports,  Aldi’s like for like sales were only up around 1% in the run up to Christmas. If correct this seems to confirm that discounter growth will come from opening new stores rather than increasing business through the shops that they already have.

ASDA has not reported results but its recent promise to spend another £500million on reducing prices would seem to indicate that they are losing the competitive battle.

Consumers were the winners at Christmas, but they were restrained in their purchasing, and unlikely to loosen their grip on the purse strings any time soon. Supermarkets and those who supply them faced tough trading conditions, and the onward march of the discounters as they open new stores combined with a desperate search for market share by traditional supermarket  operators mean no let up in competitive pressure.  The one bright spot is that less product was sold on promotion, but any savings will probably need to be ploughed back into every day price reductions.