The Sainsbury Take on What makes Consumers Tick

Sainsbury’s half year results were announced this week and showed good growth in sales and profits. The company has now increased its sales for 35 quarters in a row, something that none of the other “big four” players have done and so when CEO Justin King speaks about what consumers want it is worth a listen.

 When presenting the results King said that the better economic mood in the country has yet to be felt by consumers in their pockets and so Sainsbury’s business plan assumes that household incomes will remain flat to declining over the next two to three years.

Equally striking is his overwhelming belief that, despite the economic pressure, British consumers are driven as much by ethical values as by price. He sincerely believes that Sainsbury’s success can be put down to fairness in dealing with suppliers, high standards of food quality and traceability, (interestingly Sainsbury was not tainted by the horsemeat scandal), and attention to animal welfare, (where they have for years supported RSPCA Freedom Foods, Fair Trade bananas, free range eggs, and Marine stewardship Council fish).

King is convinced that British consumers stand right behind him on this. Which explains why, despite being knocked back twice in the challenge on Tesco’s price promise, Sainsbury are again going to the courts to claim that when comparing prices, issues such as animal welfare and Fair Trade have to be taken into the equation. 84% of consumers apparently agree with him.

According to King this commitment to values applies to supplier relationships. Speaking on the day when Prince Charles took a swipe at rapacious retailers who deal unfairly with farmers, King stated categorically that Sainsbury’s supplier relationships are totally fair.

The commitment to ethical values is an overarching strategy, and it is accompanied by a commitment to financial value in the shape of Brand Match, the scheme whereby consumers get a coupon if their branded purchase would have cost less in one of the other big four retailers. Beyond this, the Sainsbury route to winning consumer spend lies in investment in convenience stores, online shopping, and Sainsbury’s own brand where of course they can display their values credentials to best effect. In the last 6 months sales through convenience stores have grown by 20%, online by 15% and sales of mid range By Sainsbury and Taste the Difference food brands are growing at twice the rate of national brands. They will continue to invest in their Nectar card which they believe allows tailor made promotional activity directed at individual shoppers and is thus more relevant than competitors who use loyalty cards to promote to groups of people.

Cynics might say that there is no such thing as a major retailer who is fair to suppliers. Cynics might also say that it is price alone that matters to consumers and Sainsbury just happen to be on a winning streak because Tesco, Morrisons and ASDA are going through a difficult time.

But, 34 consecutive quarters of growth mean that Sainsbury must be doing something right – something that resonates with consumers sufficiently strongly to make them shop there on as regular basis.

Click and Collect – A Way of Online Shopping that Works for Customers and Retailers

Click and Collect , the system whereby  the customer orders on line but collects from the store, seems to be gaining popularity with shoppers and retailers alike.

It is attractive to retailers because it avoids what is probably the most costly part of online grocery selling - no spending is needed on maintaining a fleet of vans, recruiting  staff to fill and drive the vans, tax, insurance, and ever escalating fuel costs.

 

Customers like click and collect because it is convenient - no waiting indoors for the shopping to arrive. Instead they can swing by the chosen pick up point at a time to suit them.

And so we see ASDA setting up Click and Collect in 300 of its stores, and Tesco trialling pickup points in car parks and schools.

There are though a few facts worth bearing in mind before rushing to invest in click and collect.

First, it is still a tiny fraction of the total grocery market. Online in total as a way of buying groceries is only projected to be around 7% of the market by 2018. Within that, 18% of shoppers claimed to have used click and collect in the last month, but, just 4% of online shoppers claimed to use only click and collect. (Institute of Grocery Distribution)

Secondly, having a click and collect facility does not guarantee loyalty. Click and collect shoppers have used at least three different retailers to shop with online in the last month, compared with two for the average online shopper. They are not wedded to click and collect, or even online, and regularly shop across different channels meaning that they are prepared to  buy from discounters like Aldi, or convenience shops, or conventional supermarkets.

On the other hand, Click and Collectors are attractive customers for retailers to win. They tend to be affluent, and be working parents with children still at home, so they are relatively heavy spenders. They are technologically inclined. 61% have a tablet computer versus 41% for online shoppers using home delivery, and 90% have a smartphone versus 74% for home delivery. This means that it is easy to contact them and send relevant promotional messages.

It is this high spending potential that retailers are chasing, and they are mindful that if captured it is likely to be a more profitable business model than standard home delivery.

According to IGD, click and collect as a way of shopping is showing “unprecedented growth”, and they are increasing their forecasts of how big it could end up being.

Meat Eating Trends – Beef and Pork Meat Down, Lamb up, Chicken Nearly 50% of All Meat Purchases

From grocery researchers Kantar Worldpanel comes news that after years of plummeting consumption volume sales of lamb grew by 14% in the year ending August 13^th 2013. (Source: BPEX). By contrast pork consumption dropped by 5% and beef by 2%.

The reason is price of course. Over the same period the price of lamb per kilo dropped by 5% to £7.85 per kilo, compared with an increase of 6% for both beef and pork.

Staples like bacon and sausages have suffered from price increases too. The price hikes have led to a  2% drop in bacon sales, and sausage sales are down by 4%. The only other sector to show an increase is sliced cooked meats which grew sales by 1%.

At the same time as these figures were released we heard Andrew Large of the British Poultry Council predicting that by next year chicken will account for over half of all meat eaten, up from just over a third 20years ago.  He attributes the growth in sales to price. In the last two decades he says, chicken prices went up by 31%, whereas beef prices went up by 50% and lamb prices have doubled.

It is easy to over analyse the figures. We can though conclude that price dictates consumers’ buying habits and they readily switch from one type of protein to another. Which means that the price of, say, beef cannot rise in isolation without there being a knock on effect on consumption.

We might also conclude that the image and benefits of red meat, particularly British produced meat, need to be constantly reinforced to consumers. If they felt that red meat was a “must have” then they would bite the bullet and purchase the same quantity regardless of price rises. Yet despite the increase in lamb sales in the last year, the overall volume sold of red meat including bacon and sausages dropped by 2 %. This may seem small, but from a producer perspective a drop in demand is a cause for concern as it all too often leads to oversupply and a consequent fall in farm gate prices. 

ALDI - Delivering Booming Sales and Profits

Companies usually deliver either booming sales or booming profits – it is rare to see both in combination but discount supermarket Aldi managed to do just that in 2012.

Results posted on Monday at Companies House show that revenue grew by 40.9% to £3.9bn, and profit more than doubled, up from £70.5m to £157.9m. And this at a time when the total grocery market was growing by less than 4%. The result is all the more remarkable given that the company went into the red in 2010.

Why the great performance?

Above all Aldi wins customers because it is cheap. Price is key in these straightened times, and according to Aldi the average basket of goods bought from them comes in at 20 – 25% cheaper than the “Big 4” grocers, Tesco, Sainsbury, Asda and Morrisons.

They are adapting their business model to be more like the Big 4, both in the products carried and in the service provided. The range been extended from a basic 800 lines to 1350, and a premium brand “Specially Selected”  introduced to compete with the likes of Tesco’s Finest and Asda’s Extra Special.

More emphasis has been given to fresh food. Sales of fresh meat have grown by 60% in the last year and fresh vegetables by 50%.

More staff have been recruited and more tills opened in stores to cater for the growth in sales.

According to Aldi, “We learnt from customers that we needed to become more British”. This has  meant a greater commitment to buying British meat, milk and eggs, but it also seems to reflect a recognition that to grow, Aldi has to become more like the shopping experience British customers are used to, hence the move to premium, to British sourcing and to wider choice.

As to future growth, Aldi  currently have around 500 shops and plan to increase by 84 before the end of 2014. Running counter to conventional thinking about growth channels, they have stated that they will not expand into convenience stores or sell food on line. Instead they will concentrate on doing exactly what they are doing now.

Their challenge will be to hang on to their price advantage at the same time as absorbing the increased costs which come as they adapt to being more like a standard supermarket. If they lose their price competitiveness then they lose the prime reason why shoppers choose Aldi.

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.