Doesn’t time fly! At the end of last year, we looked forward to 2017 and made a few educated guesses about what we might expect from grocery retailing. If you would like a recap, read the blog here first.
Sweeping statements concerning online grocery sales, the use of tech in supermarkets and pricing were made by many and we added our thoughts to that stream of consciousness, influenced by what our clients were wrestling with and where we saw consumer trends heading.
As we approach the upswing of the golden quarter we thought it would be fun to look back and see whether the predictions we made came to fruition.
Price architecture outweighs promotions
Concentrating on the grocery sector we first predicted that the industry focus would be on price architecture rather than on promotions to present good value to the customer.
This was an easy prediction to make, the customer increasingly influenced by price as demonstrated by the discounters, and their increasing market share.
We were told most recently by Tesco that the number of multi-buy promotions has reduced year-on-year by 10% and that Tesco has the lowest level of food price inflation for customers amongst its peers, c.1% lower than rest of market.
We have often said that price is not going to win share of customer spend on its own. Aldi and Lidl are growing with luxury products, but at very competitive prices. It is about how price fits into the overall proposition. If it’s just cheap, that isn’t enough and Tesco with Aldi and Lidl know that.
Margin enhancement through volume
The grocers will be looking to grow store margins that don’t depend on price increases. The pressure that grocers are under to maintain prices and grow margins while Brexit is pushing costs up, is extraordinary. On a unit by unit basis the buyer has an impossible task.
However, through strategic consolidations we are seeing evidence of supplier volume growth. Again, looking towards Tesco’s H1 results, they reported doubled volumes with c.100 suppliers.
According to a study by IRI, the number of items stocked by supermarkets across the UK declined by -5.7% in the year ending February 2017. An average of 930 fewer products were available to shoppers in their local supermarket. This naturally gives rise to the opportunity to grow volume and improve margins.
But beyond that the grocers are penning supply deals with wholesalers, convenience chains and Amazon. The volume advantages that this presents position the grocers to be able to grow margin to offset whatever life after Brexit has in store.
Ebb and flow of innovation suffers
Simplification is the margin’s friend. Innovation is complexity’s friend and with that cost. We suggest that the conversations in Head Office have been ‘go forth and innovate, but only with existing suppliers at minimal cost’. Range innovation, namely own brand development is evident in food and non-food but store innovation has been less pronounced than we have experienced in prior years.
Store refurbs, face lifts and tweaks are present but beyond that it is all about tech driven innovation and business model innovation.
The purchase of Whole Foods by Amazon and their increasing foray into the grocery sector seems set to continue to rock a few boats. Amazon are not playing at shops but have an earnest intent on being a real player, and have the resources and organisational culture to test, fail, test, trial and make it happen.
Innovation takes on a new MO, we are seeing a drip feed of small changes that each in their own right feel inconsequential, but when taken collectively and compared to prior years, start to take on a new innovative shape.
Tech available to customers will explode
Smartphones and apps were predicted to heavily influence the customers shopping experience, but we said none would pay back in 2017. We have seen cashless shopping trials, beacon messaging and Alexa writing our shopping lists for us; none are revolutionising the business model and paying back.
While we listen to the customer about what they want from tech, none of it is a real need and has not penetrated to the masses. Rather we are seeing a lot of gimmicks that are good PR stories but are all too early for even the early adopters. The industry just needs more time for the transition from gimmick to mainstream.
Ways to reduce the labour cost
The National Living Wage became a good PR story for a couple of grocers, increasing salaries earlier than legally required, as Lidl did, by more than was legally required, as Lidl did. Later in the year we saw job cuts.
The battle to find the right formula between payroll and service plays on. From experience the only winners are those that maximise productivity in stores, streamlining tasks to reduce hours in non-value-added activity and reinvesting in customer service. Morrisons for instance, are making progress in that direction with the long awaited automated ordering system. Availability is improving and operational efficiency will follow once the reaction to change has subsided.
We are not there yet. Sainsburys announced a further 2000 job cuts largely from within stores this week. While we appreciate the overwhelming effect this will have on store staff, the business must be as efficient as it can be. Whether it feels like an axe or scalpel is down to your perspective, but ultimately a streamlined efficient business is a business that has happier more productive staff which is more able to grow profit.
Filling space with known footfall and profit drivers
The Big 4 are still over-spaced in their largest formats. Some headway has been made, notably Tesco opening Currys PC World in its biggest stores and Sainsburys rolling out Argos digital stores and Habitat shop in shops. Footfall and profit drivers beyond that have been a bit scarce and this action remains doggedly on the to-do list.
Watch out for our predictions for the retail trends to watch in 2018 in a few weeks’ time.