supermarket

Supermarket retailing in troubled times

Supermarket retailing in troubled times

All downturns produce winners as well as losers and the supermarket sector is no exception. Looking mainly at the UK and US, Seth and Randall see the predictable pattern of polarisation with Wal-Mart and Tesco as having the capacity to cope with troubled times. Winners are also the discounters with question marks over just how well the premium brands M&S and Waitrose will cope. Losers are mainly the independents with further question marks over the big brands (Sainsbury’s and Morrisons) in the middle. Looking further ahead, the authors speculate on trends that will shape the post recession period: more personal service, smaller high street stores, sustainability, continued internet shopping and the ever-present attacks by a range of lobbying groups.

 

SUPERMARKET retailing has been much in the news – for obvious reasons. In difficult times, it is the weekly shopping expedition that the crunch hits first and, for many people, hardest. This article looks at the supermarket scene in the UK and US to see who the winners and losers are in this important category. In addition we look at longer term trends already taking shape.

 

Who is winning?

 

Wal-Mart

If you accept its statements and recent revenue figures, it’s once again in rude health as US customers, on whom it is largely dependent, reacquaint themselves with Wal-Mart’s ‘low price – always’ message and its omnipresent one-stop-shopping model. Wal-Mart has six mammoth shopping centres on a 20-mile stretch from Phoenix to Scottsdale. Simultaneously they’re all flourishing.

However, Wal-Mart’s success outside the US is confined for the moment to NAFTA (Canada and Mexico) and British Asda. Germany was disastrous and Japan looks little better, although its efforts persist.

Tesco

Powerful at home, now justifiably viewed as the West’s most innovative retailer. Far from slowing its expansion as hard times bite, Tesco has been putting the foot down. No question, Leahy’s team see tough times as more of a help than a hindrance. Taking an international view, Tesco is now best in class: strong in Eastern Europe, a good and growing presence in Asia Pacific (see page 36). But it is its going west that has caused most fluttering in the dovecots.

By its own high standards, the Tesco move into California is brave and innovative. By anyone’s standards it shows revolutionary elements, starting with the brand name (Fresh&Easy). Unlike anywhere else, it adopted a small-store format (10,000 sq ft) perhaps anticipating emergent trends, (of which more later), and rapidly opened 60 stores before controversially announcing an understandable pause in proceedings.

Its food distinctiveness is built around a locally owned ‘kitchen’ supplying much of the fresh food, and features personal counsel on recipes and food matters in-store, while unmanned checkouts are mechanised. Differentiation is based on high-quality, fresh food, visible store service and deliberately low pricing. The ambition is there for all to see.

Is it working? Commentaries are mixed, but the company remains confident and essentially it will be months or years before anyone knows. However one sure sign of salience is that both Wal-Mart (Marketside) and Safeway (Vons) responded by opening their own comparable outlets, apparently concluding this was a trend they could not ignore. Less obvious is the latter’s high-price strategy, no doubt aimed at keeping its new brands as ‘niche’ entrants, and minimising cannibalisation of existing business – an anxiety that Tesco does not have.

Our view, obtained on the spot in California this year, suggests that Tesco may have got a lot right. The combination of fresh food quality, unique in-store consumer service, and competitive pricing looks formidable. Tesco has put its best talent into the US, and its tenyear track record has been outstanding. With Wal-Mart defending itself vigorously, others imitating, and a strong Aldi brand (Trader Joe’s) alive and well in the US west, Fresh&Easy will be thoroughly examined. If it works, the company will have an interesting brand available elsewhere – probably including the UK, where a small-store high-street and suburban presence can be exploited.

Discounters

There are other winners. As you would expect in a recession, discounters are in fine form, notably Aldi in Europe and its Trader Joe’s US subsidiary. Next Lidl, which is a force right across Europe. Its stripped-down stores, scrimpy ranges and bargain-basement prices gain share virtually everywhere.

Who loses?

The short answer is the independent trade – smaller than ever, but destined to become smaller still, given its lack of competitiveness. Secondly, middle-ground retailers, probably including Sainsbury’s, recovering from its traumas but acutely pincered by Tesco and Asda on the left and Waitrose and M&S on the right. Sainsbury’s remains unable to deliver decent trading margins. Morrisons, having absorbed Safeway, retired its doyen founder and relaunched under new leadership, looks better placed.

The rest will surely find life difficult. Circumstances similar to the UK will apply in Western Europe and the US. Discounters with limited product range, good space utilisation and rock-bottom prices attract more consumers and grow. The best self-service operators – Wegman, Whole Foods, Publix, H.E. Butt in the US – may remain unhurt. But the undifferentiated, less clearly positioned supermarket brands will certainly suffer share decline.

How will the top end fare?

Will the top-end of the market collapse? Perhaps not. In Britain Waitrose does well and confidently announces smaller stores. Waitrose delivers consistent quality as does M&S, although we have yet to see how much further damage will be done to M&S’s share price and how the new foods director will work out. But providing it keeps quality perceptions, consumer concern with nutritional values and health will stand these brands in good stead, and will not disappear.

Longer-term trends at work

Recessions do not last for ever, however, and we should look beyond the current depressed climate to ascertain whether there are more lasting forces at work that will change the consumer’s outlook on food shopping. We think there are, and though some may be embryonic, they are noticeable and different from past trends. We suggest that these trends may be strong enough to become permanent.

At its most fundamental we see an emerging relationship between provider (the store) and customers, which will differ from what we have been used to for most of the past half-century. This sounds a bold claim and we need to offer evidence.

The prevailing model of out-of-town superstore/hypermarket/supermarket shopping that has dominated food retailing in the West – and, increasingly, elsewhere – for almost half a century may be in for a change. Trends are not for ever; they are by definition cyclical, even though cycles may be very long.

If consumers see important advantages in some new offer, they will change their behaviour and what were originally seen as maverick providers gradually gain momentum.

Our contention is that we may be at the earliest stages of such a change in food retailing. Here are some signs that we see emerging.

Demands for personally relevant goods and services

At its root is the arrival of more demanding and discriminating shoppers. This is no new phenomenon – people have said this for years. However, the providers have remained firmly in control hitherto, and delivered what they saw as the appropriate response as and when they were ready, and invariably at no cost to themselves.

The importance of food and nutrition, concerns for health and physical well-being, obesity worries, genuine attention and delight in food preparation, and an overall awareness of ‘what I want and need’ drives this change. It manifests itself in a desire for information of value and personal counsel – consider the plethora of recipe books, omnipresent food pundits and unavoidable food programmes on prime-time TV. Food stores will need to respond – Whole Foods, Waitrose, Marks & Spencer, Trader Joe’s, Fresh&Easy all know they have to do so.

Personally relevant information becomes the relevant discriminator, delivered as and when it’s wanted, and wherever possible, face to face by individuals, i.e. not by machine and not to the world at large. That this will cost the providers is self-evident. That it will therefore frequently be resisted long and hard follows – remember human service costs in developed societies are those that rise fastest. But, at the end of the day, consumers rule, and when they decide on change, it will happen. That time may well be with us now.

Internet shopping

Of course interactivity between provider and consumer can take place in many ways. The internet has been a radical new force in developing information provision to shoppers and in some cases it has taken over entire transactions. We can expect this to continue. We can also expect higher standards of demand to become pervasive as consumers seek more precise, personal, reliable and accommodating responses to their cusrequirements. Ocado, the well-regarded but still after eight years unprofitable internet specialist, is poised interestingly as recession bites. Whether it can grow and, a fortiori, deliver profits is uncertain

Our contention is that the era of the impersonal transaction-managed food shopping is already beginning to disappear, and through time the need for informed and personal guidance will grow – if it works for, say an expensive fillet-steak meal, why can’t it also work just as well in home hygiene, health and beauty, bread varieties, even water?

Ironically we may be witnessing a return to old corner-store patterns of behaviour, where the retailer’s first move was to greet shoppers, whom they usually knew well, – invariably by name. A resultant shared communal relationship existed between them, which was often very hard to break.

Climate change and sustainability

Environmental concerns have been significant new forces affecting consumers and providers. While the recession may have driven this down the priorities list for the moment, it has not gone away. For many people, and for a high percentage of ‘thought leaders’ these issues remain paramount. Research shows 25% of UK consumers list this as an enduring high priority. Their deeply held and rational concerns will not be resolved by frenzied action from retailers or an expedient government on matters such as plastic bags. The issues are more enduring and comprehensive.

It is heartening after decades of endemic decline to talk about the Co-op’s capacity to differentiate and grow using ethical and environmental values, the Co-op is now better placed to succeed.

Packaging is certainly a major element in its resolution and it’s interesting to note that it is ‘over-packaging’ of fresh food that apparently worries Fresh&Easy’s leadership most. Our view is that as this issue retains its prominence and grows in significance it will affect many more aspects of food provision and buying, and in a more radical way than it has done so far, affecting ingredients, food composition, distribution, communications and indeed all significant aspects of the shopping transaction.

The return of the high street?

Shopping by car (still the invariable norm), store parking, traffic congestion, poor public transport provision and the high price of oil are all major and linked issues. Given the constellation of store availability in the UK, but even more in the US, there is today little alternative to shopping by car. One-stop shopping is an appreciated consumer benefit. However, this may not last in its present form.

Alternative models exist. French towns retain vibrant high streets, and well-patronised food shops invariably populate them. Of course, time-starved families rarely have time to shop for fresh bread twice a day but some adjustment towards this alternative model, among others, may be imminent.

Could this be one reason Fresh&Easy opened (many) local stores – small in size – in the US? Does Waitrose have similar notions in the south of England? May this even be a part of the Co-op’s future arsenal – possessors as it is of many little-regarded high-street stores? Tesco began its modest rejuvenation of the high street with the Metro operation ten years ago so it – and Sainsbury’s, who quickly followed – knows that it can work.

However, it is the notion of ‘consumer engagement’ and of an emergent ‘community’ that may give this movement its big kick forward. This is a bold assertion and would, were it to happen, represent a major change for free-market Western society. It is certainly not established among a major cus tomer segment today and has a long way to go before Anglo Saxon food culture gets anywhere close to, say, its Mediterranean equivalents. All we are saying is that some early signals of this kind of change in the US/UK can now be detected.

Big retailers under attack from pressure groups

From what has preceded you might conclude that competition is alive and well around the retail world. In fact divergent trends can be seen. Alongside increased willingness in some places to ‘let markets decide’ and assume the consumer will benefit at the end of the day, there are countervailing trends. Immense pressures exist on major retail players from consumer movements. The biggest companies experience the most determined and frequently hostile, pressure. Wal-Mart tries with difficulty to control a big-scale America-wide protest movement, where articulate forces collaborate to arrest its apparently unstoppable expansion.

The same thing happens at British Tesco, with assorted groups of animal-rights activists, high-value chicken farmers and overseas shop-floor representatives uniting to seek to destabilise the company’s AGM. Of course we need not feel sorry for these companies: they are big and strong enough to state their case, which they do firmly and occasionally with venom. But pressures grow. They are better informed and effective, and since they often attract tacit or even overt political support, they have become major factors preoccupying company leadership. In the UK, supermarkets have been investigated three times in a decade by government agencies and a fourth investigation seems now to be underway. Is this sensible use of resources?

A different (and better?) future

The conclusion seems to be that food retailing has never been more excitingly poised between a group of developing consumer demands and a set of highly competitive companies. The market has over ten years become, once and for all, truly global, which makes these movements more visible and relevant, wherever you live. Some of the results may represent the beginnings of a genuinely better world, as indeed were the first self-service stores 50 years ago. What seems clear is that the most determinedly innovative deserve to win fastest – be they consumers or retailers.

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[email protected]

 

The end of cheap food?

In addition to the current economic downturn there are more fundamental issues. Indeed, some critics have concluded our whole retail model is unsustainable. If you’re feeling strong, try the melodramatic opinions in Hungry City: how food shapes our lives (Carolyn Steel 2008) or The End of Food: the coming crisis in the world food industry (Paul Roberts 2008) for a genuinely frightening world vision.

These authors argue that the quantity and quality of food we have come to take for granted in the West can’t last much longer. The paradisal dream of plenty realised daily on supermarket shelves piled high with cheap, colourful, convenient and reliable produce turns out in fact to be more of a nightmare. It not only denies the nature of food itself (‘seasonal,  squashable, bruisable, irregular, unpredictable, in Steel’s words), it is unsustainable as well as dangerously destructive in the long run. It rests on coercive, conformist and monopolistic policies openly dedicated to the suppression of individuality, autonomy and free choice.

We expect to see more of this kind of polemic.

Adapted from Hilary Spurling, The Observer, 8 June 2008.

We may be witnessing a return to old corner-store patterns of behaviour, where the retailer’s first move was to greet shoppers, whom they usually knew well – invariably by name. A resultant shared communal relationship existed between them, which was often very hard to break.

 

Asia in the cockpit

Now we have Asia, responsible for seismic change in the world market. No question this is the cockpit, a place where anyone who wants to figure in global retailing simply has to be. For a period it has been China dominating thinking, and every major player beats its way in and jockeys for early advantage. Carrefour was first and it has fine stores in big Chinese cities, but Wal-Mart, possibly negotiating cleverly with the Chinese authorities, could accelerate its expansion, while Tesco, with its Hymall partnership, and Metro’s cash and carry format are all present. It will be years before the real winners emerge.

If China was an entry challenge, dynamic India shows signs of being much more difficult. With the largest young population in the world - 900 million people under 45 - India is staggeringly attractive. The ‘modern’ retail segment grows at 40% p.a. compared to the overall growth rate of 10%. Recently India has witnessed rapid store transformation by encouraging a whole set of scalable and profitable retail models. Increasing penetration of hypermarkets, supermarkets and even one thousand or more mega speciality stores are expected quickly.

There are several well-funded Indian retailers (Reliance, Godrej, ITC, Birla), and aspiring international competitors will have to strike partner relationships with local Indian companies - as Wal-Mart achieved and Tesco desperately covets. Their urgency is understandable. While the West reels under recession and collapsing spending, supply exceeds demand. India confronts inflation and industry, and retailers can’t provide what consumers want. This change is as significant as the arrival of the postwar European supermarkets and it should have comparable societal effects. However it’s worth noting that, true to form, the Indian government sets out to make it inherently difficult for foreign investors to enter - the process won’t be easy.


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