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.