The UK grocer’s shareholders are breathing a sigh of relief after the industry reported a better than expected Christmas and Q3 trading. There were one or two little surprises nestled in the results last week but overall, food sales were strong only hampered by general merchandise sales.
Looking across the industry a couple of trends were apparent that should inform the industry’s thinking as it moves into 2018: Premium versus Value for Money and Clicks versus Bricks.
Premium versus Value for Money
We all know that the customer likes to push the gravy boat out for Christmas, trading up to more premium foods to treat the family to a Christmas meal to remember. However, rather than foregoing their normal supermarket to go to a more upmarket grocer like Waitrose or M&S, this Christmas the Big 4 and importantly Aldi and Lidl, made it even easier for their regular customers to trade up without shipping out.
Value for money is the key take out for us this Christmas. It is less about the price or the brand, it is more about whether the product offers great value for money. Price comparison websites and savvy shopping means the customer is ever more informed about price and provenance so knows value when they see it. The discounters in particular, have worked very hard on brand perception and have spent hard on quality advertising to convince the shopper that their products are worthy of the Christmas dinner table. And it worked.
Aldi and Lidl total sales continued to soar while M&S food like-for-like sales dropped. Some of the discounter’s growth comes from new space of course, despite that, for M&S to be down year on year, when everything we think we know about the brand says customers trade up to M&S at Christmas, something has shifted.
We are in new territory. Basic veg at rock bottom prices and premium own label in the same store makes for a happy customer. Squeezed into the middle ground is branded and mid-range own label. Range reviews will be focussed on the price, quality and value mix, opportunity to trade up and margin maximising in mid ranges.
Food inflation has slowed a little, giving retailers an opportunity perhaps to recoup some margin through Q4 where they can. It is not only food margins that have been under pressure though, higher margin general merchandise like for like sales are down at Morrisons, Sainsburys and Tesco.
So while the retailers are conducting their range reviews, margins targets will be under heavy scrutiny too.
Clicks versus Bricks
The operating cost of online sales compared to bricks and mortar sales is a tricky one to separate out. Too many costs are shared across both channels, one channel leveraging off the other. However, the cost of delivery to homes is instinctively higher than the cost of a customer transporting themselves to the store, picking their own produce and transporting it back home.
With online sales coming in at double digit growth for some grocers over Christmas, the cost of fulfilment will not be far from the Finance Director’s thoughts. The higher the sales through the channel the better, the more fixed costs can be leveraged. The higher each transaction the better, the better ratio of basket spend to delivery cost. But as the mix of sales moves towards online, the impact on overall profit margin and the business model becomes more significant.
To operate as a grocer and not have an online offer is almost inconceivable; to not have an online offer through Christmas is almost negligent. While there is always an exception to the rule (Lidl), the grocers with an online offer are quoting strong growth figures year on year as the customer base reaches new audiences who perhaps had been reticent about the service. It is no longer just the territory of Generation Y and younger.
The need to for the online offer to be seamless within the in-store offer is urgent. There is no such thing as an online customer and an in-store customer, they are one in the same. The channel through which they decide to buy is determined by their needs at the time and not through a demographic. Online is nothing more than a channel, and should be seen no differently than a different store format.
For 2018, the grocers that do well will be those that invest in getting close to their customer. The better they know them, their shopping habits and needs, the better the offer both in terms of range and in terms of what range is available in what formats.
Then there is of course the small matter of keeping that range available on shelf when the customer most needs it. Perhaps that will be the lesson for 2019.