Comment: UK grocers winning the strategy battle
Whilst we are not out of the woods yet, the past few months have seen some tentative signs of welcome economic recovery. By Anthony Lucas
The UK’s leading grocers have focused on delivering increased consumer value to maintain their market share during the recession. The top five food retailers have, to a large extent, been able to counteract the rise of grocery discounters by introducing their own range of value brands. On the whole, this has been a successful strategy and, regardless of any economic improvement, major grocers are likely to maintain a strong focus on their value brands for the foreseeable future. Leading grocers have taken on board the need to segment their ranges and now offer both premium and value ranges.
The recession has forced many retailers to consider new and collaborative strategies to increase sales and develop new revenue streams. The focus has been on expanding market reach with joint initiatives. For example, Marks & Spencer is opening 20 food stores in hospitals. So far, sales at the first hospital franchise have exceeded expectations and the company is continuing to roll out more of these stores.
Another good example is Waitrose, which is currently working with Boots to expand its market reach. Under the terms of the deal, the retailers will stock each other’s ranges, with the pharmacy chain supplying health-care and well-being products, and the grocer supplying a range of foods. In addition the pharmacy chain will open in-store branded pharmacies in a selected number of groceries.
Post-recession, grocers will seek to devote the majority of new space to non-food products, which will include extending existing ranges such as clothes. Other totally new categories and ranges might include financial services, property and fitness equipment. Sales of non-food products are expected to increase by 40% over the next 5 years. Increasingly, the goal is to increase customer loyalty and retention by offering not only value and loyalty rewards, but also a one stop shopping experience. Grocers now realise that customers want somewhere where they can buy everything, not just food.
Time pressed shoppers are looking for faster and easier ways to shop. The convenience sector has benefited from this trend and will continue to grow by an estimated 50% over the next five years. ‘Food to Go’ will increasingly play a key part in this growth as convenience stores tap into the growing markets of working women who are short on time and single person households who only need to buy small quantities. In order to increase their appeal to a wider audience, convenience stores need to launch more own label brands to attract cost-conscious shoppers.
There will also be an increased focus on convenience among major grocers as they continue to roll out kiosks and self service scanners throughout their stores. Indeed, Britain’s leading grocer recently opened its first ever self service only store, perhaps an indicator of things to come.
It has been nearly a decade since the first UK grocery store launched its online service. Online grocery shopping is booming and will continue to grow. A number of studies predict that online grocery shopping will more than double in value within the next five years - a growth rates three times higher than for the sector as a whole. 40% of shoppers will shop online in five years, as opposed to just 13% today.
In recent years, grocery retailers have increased their focus on overseas expansion, accelerating the pace of grocery retail globalisation. A number of factors have contributed to this - the maturity of the UK market, limited opportunities for new UK stores and new opportunities to win new customers in emerging markets. The three largest grocery retail markets are the US, China, and Japan. Together they make up nearly one third of the world’s grocery retail spend. Emerging economies such as China, India, Russia and Brazil will, however, fuel the most growth in the sector. The IGD estimates that the grocery retail markets of China and India will each grow at a compound annual growth rate (CAGR) of 13.2% between 2008 and 2012, outpacing any other country in the top ten. In addition, Russia’s grocery retail market is forecast to grow at a CAGR of over 11% in the next five years.
Tesco, the UK’s leading grocer, now operates in 12 overseas countries including the USA, Thailand, Korea and Poland. Overseas markets now account for 25% of the group’s revenue. Tesco says it wants to increase its overseas business to 50% of revenues over the next 5-10 years and accordingly 80% of its capital expenditure is now being spent overseas.
Another example of overseas expansion is that of Waitrose, which is planning to follow up on a strong domestic performance with an aggressive overseas expansion. The retailer is planning to open outlets in Bahrain, Oman and Abu Dhabi this year.
Although many UK grocers have been cautious on international expansion in recent years, the success of Tesco in expanding overseas will mean many will now adopt a more aggressive position.
As we at last begin to emerge from the recession, value and price competiveness will remain the cornerstones of most grocers’ strategies. However, we will also see a greater focus on growth, driven largely by increasing ranges and categories, geographical expansion, as well as a demand for increased convenience. The big question now is who will win as grocers battle it out to meet consumer demands in the post-recession world.
Anthony Lucas is a Senior Director and co-head of the UK Retail & Consumer team in the performance improvement practice of Alvarez & Marsal.
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