The grocers generally traded well over Christmas, but not even Justin "there's nothing to fear but fear itself" King now expects the industry to emerge unscathed. Marks & Spencer is already having a torrid time of it, this week announcing more than 1,200 job losses and the closure of 27 stores. On the other side of the fence, Premier Foods is struggling to restructure its £1.8bn debt and Bakkavör has confirmed that up to 400 jobs could go at its three Lincolnshire plants.
After the recent slew of administrations on the high street, it would be naive to think the grocery industry is immune. Like the flu, the economic downturn will hit the young, the elderly and the infirm hardest. The survivors will be those that keep up to speed with changing consumer shopping patterns and expectations.
We're already seeing a major paradigm shift. Conspicuous excess is being replaced by the old-fashioned concepts of frugality, thrift and 'make do and mend' as consumers, egged on by celebrity chefs, turn to leftovers and cheaper cuts of meat once more.
In the era of inconspicuous consumption, value for money is key - good news for the discounters, though this week's escalation of the price wars shows the multiples won't be surrendering market share without a fight .
Corporate power is giving way to people power - and not just when it comes to determining the outcomes of TV game shows. Consider the impact of a couple of hundred viewer complaints about the Heinz Deli Mayo 'gay kiss' ad last year.
And a new sense of morality seems to be sweeping the nation, epitomised by public outcry over the antics of Ross and Brand - and the Government's continued focus on obesity and healthy eating.
In many ways, the new ethos harks back to the principles espoused in 1970s sitcom The Good Life. But though Tom and Barbara weren't exactly flush with cash, they led their life of self-sufficiency largely through choice rather than the current state of necessity.
In the real world of 2009, consumers and businesses will have no choice but to subscribe to a simpler aesthetic - a way of life arguably more akin to the post-war era of the 1950s, when rationing was still in force, than the 70s.
Over the next few pages, we take a look at the major trends and events we believe will shake up and reshape the industry over the coming year. We also ask some of food and drink's biggest names to voice their opinions on the challenges - and opportunities - that lie ahead.
Their message? Things will be tough and there will be casualties - but never under-estimate the industry's resourcefulness. Necessity is the mother of all invention and what more inventive industry is there than the grocery industry?
Chief executive, Asda
"We can already see how changing attitudes are affecting shopping habits. Consumers are not prepared to pay a premium when they cannot taste the difference. The era of conspicuous consumption is over and saving money by cutting out waste will be the priority. I don't see this being a short-term response to the recession, but a fundamental shift where a new breed of customer will emerge. They will want more value for money and genuine price transparency. Retailers will have to respond - those who continue with high/low pricing will become increasingly distrusted."
Chief executive officer, Booker
"In 2008 our customers said our choice, price and service had improved, so we need to build on this in 2009. This year consumers will be searching for value. They will be careful about how, when and where they spend money. They will shop locally and count every penny. This will favour the local shop, as the average spend is low. In this environment good independent retailers will thrive."
Chief executive, The Co-operative Group
"Next year won't all be about price. Increasingly, I believe customers will be looking for 'value with values' - they will turn to brands they can trust. We've already seen customers react to the failure of ethics at the heart of some of our major financial institutions and this presents businesses based on strong values and principles, such as The Co-op, with a great opportunity. Unlike some people, I'm looking forward to 2009."
Chief executive, FSA
"We will continue to work together with the industry to make healthier eating easier for consumers. We will be encouraging individuals and companies alike to take further action to reduce salt and sat fat - whether manufacturing, selling, buying or eating out. We'll be interested to see if GM comes back on to the agenda - if the debate is re-opened, the FSA will want to be at the heart of it."
Chief executive, Sainsbury's
“Our continued success has been founded on delivering universal appeal. We have maintained our values while stepping up campaigns such as Feed Your Family For a Fiver and Switch & Save. Getting ‘value for their values’ will be the key customer trend. Of course, customers will seek out great prices and offers, but I believe we will also see them ask ever-tougher questions about the issues of the environment, ethical sourcing and animal welfare, to name but three. They will want to ensure their hard-earned wages are spent wisely.”
Director general, BRC
"Put crudely, retailers' main priority will be to stay in business during an incredibly tough year. For most, that may be overstating it. But for some, success will simply be coming through the other side. Working with suppliers to continue long-term sustainable relationships will be essential to all successful retailers. Suppliers will be under pressure because customers want shop prices contained and food inflation will slide further."
Chief executive, McCain Foods
“Companies and brands that maintain a consistent consumer promise and positioning are more likely to retain consumer loyalty in the longer term. We have lived and worked through more than one recession, and history has shown us the importance of not losing sight of long-term strategy and objectives. Our industry has successfully embarked on a socially responsible journey, which must continue if we are to achieve long-term competitive sustainability.”
Director general, FDF
"Despite the wider challenges, I expect both health and sustainability to remain key themes for FDF members. Our commitment to enabling healthier lifestyles - through product reformulation and widening choice, providing at-a-glance information through GDA labelling, and in our own workplaces - is deep and long-standing, and will continue in line with consumer demand."
Managing director, Bestway
“Our key priority is to remain positive and apply that principle to everything we do. We need to grasp as many good pieces of news as we can and make them work twice as hard. I like to think the industry will react to the recession in the same way it always does – by staying in touch, remaining flexible, being alert to opportunities and acting as fairly and reasonably in as many ways as it can in its trading.”
Chief executive officer, ESA
“Inflation will not be the big issue it was last year, but consumer demand will still be depressed as households turn to saving. The challenge is now to stimulate demand through value. One half of the value equation is price – I think downward retail price pressure will continue unabated throughout the year. The second half of the equation is where the real battle will lie – namely high quality at low prices. When all prices are low and declining, consumers will choose and switch on quality. Retailers and manufacturers that look beyond price and promotions to high quality at low prices will be the winners in 2009.”
Chief executive, IGD
"People will not abandon tastes and values built up over many years, but will explore ways to achieve their objectives at lower cost. For retailers and suppliers, tight financial management will be essential, and that includes closely watching over cashflow and potential bad debts, and dealing with currency fluctuations. Identifying and eliminating all forms of waste throughout the chain will be vital to retaining profit margins."
"We'll be working hard to help farmers adapt to the tough environment, both in terms of market volatility and intense financial pressures. Regrettably, too many retailers will think short term. We are already seeing price pressure being applied to suppliers, which makes them less able to invest in the high-welfare, environmentally friendly production standards demanded by consumers in the UK."
1 Healthy living and scratch cooking
Will the Government’s £8m Change4Life TV ad campaign succeed in getting a nation of fatties off their backside? Cynics will argue that urging people to get their kids to ‘eat better, move more, live longer’ is a noble objective, but impossibly idealistic – especially when it comes to the ‘move more’ part (a generation raised exercising their mouse fingers rather than their bodies has seen to that). But this year, the healthy-living message could have real resonance with consumers. Many will feel that though they can’t control their finances, they can control their diet and general health – at relatively little cost. Scratch cooking is already enjoying a renaissance as consumers look for cheaper and healthier ways to feed their families. It will only gain further momentum as the deepening recession forces more people to go back to basics. So goodbye expensive ready meals, and hello cheap, healthy ingredients for home cooking.
2 Retro fever
During a downturn, nostalgia is always big news as consumers seek comfort in brands from their youth and manufacturers look for cheap alternatives to NPD. We’ve already seen Wispa and a slew of confectionery brands return to our shelves. But Birds Eye’s revival of the Arctic Roll suggests there are plenty of opportunities elsewhere. The downside? Manufacturers could dispense with real innovation, which, as any expert will tell you, is a big mistake in a recession.
3 DIY entertainment
Old-school dinner parties are making a comeback as Brits ditch expensive nights out for eating in. A new generation of Abigails are showcasing their rediscovered scratch-cooking skills via an array of classic dishes featuring traditional - and usually cheaper - cuts of meat. Think comforting game pie or hotpot, rather than a lamb shank or sirloin steak. Retailers have been quick to capitalise. In September, Waitrose re-introduced Bath chaps (pig cheek), ox cheek and pig trotters in an attempt to win over shoppers on a budget. And there'll be more game on the menu now the big four are supporting the Game to Eat campaign for the first time.
People are rediscovering The Good Life and extending their self-sufficiency skills beyond home-grown veg to baking, brewing, pickling and smoking. Allotments are enjoying a revival and this year will see more communities band together, whether to cultivate unused public land, take over struggling local businesses or swap and share skills. Frugality and ethics are key and consumers will expect these values to be reflected by their supermarkets - though it's probably not time to replace cashiers with honesty boxes just yet.
5 Discounters/own label
The Grocer 33 revealed discounters were more expensive than the big four - but that hasn't dented their appeal. In the 12 weeks to 30 November, Aldi's sales shot up 25.4%, while Lidl's rose 10.5% [TNS]. Their rivals are not standing idly by, however. Tesco now has its tertiary discounter range and Landmark Wholesale is to relaunch its own-label value range. Meanwhile, Sainsbury's is increasing its Basics range and Bestway has pledged to develop its Best-in own-label range. The battle lines have been drawn. With the focus now squarely on own label, just pity the poor brands in no-man's land.
Industry heavyweights insist shoppers are not buying purely on price and that quality, ethics, traceability - what they describe as "the value of values"- remain paramount. Yet price is very much key to their sales strategies at the moment. Featured space promotions were up 28% over Christmas compared with the 2007 festive period [Assosia] and Asda's high-profile price campaign slashing the price of 1,000 everyday items to £1 suggests the multiples will be pushing the pricing envelope ever harder this year. The question is: for how long and with what impact on shopper loyalty?
7 The lipstick effect
People struggling to afford the mortgage will still stretch to the little luxuries in life. Coined 'the lipstick effect' by cosmetics king Leonard Lauder, there's every sign its impact will spread beyond make-up. The 33.4% value sales growth of Thorntons chocolate last year [Nielsen] is one example of consumers paying a bit more for a treat. That's not to say premium food won't be affected, and how well the retailers specialising in it - namely Waitrose and M&S - will fare over the coming months remains to be seen. But the market for everyday, affordable treats should go from strength to strength.
8 Supplier/retailer relations
Squeezing your suppliers is one thing, driving them out of business quite another. After years of pressure, there are signs that retailers are relaxing their stance with suppliers. Asda has cut payment terms to some small suppliers to 20 days and there have been reported improvements in the way Tesco is dealing with suppliers following its infamous decision to renegotiate terms with many of them last autumn. Will the new spirit of rapprochement last as long as the recession? Probably not.
9 Long-life food
Sales of long-life food formats are expected to do well as consumers look to reduce waste - and cost. Canned soup sales, growing at 6.8%, are already outpacing fresh's 4.6% growth [TNS 52w/e 30 Nov 2008], while frozen specialist Farmfoods' sales are up 18.5% and Iceland's 11.6% year-on-year, according to TNS. With chilled food suddenly out in the cold, this could be frozen's year. If only retailers could merchandise the category in a more innovative way - and manufacturers get a bit more creative with their NPD.
10 Local love
“This is a local shop for local people,” said Tubbs in The League of Gentlemen – but it describes the current wave of support for all things local perfectly. Though question marks remain over Fairtrade and organic, both of which are perceived to carry a premium, locally sourced food should continue to thrive. As should local retailers. The challenge will be over pricing – there’s always a danger shoppers will reduce their ‘pricier’ top-up shops in favour of cheaper one-stop trips to the multiples.
1There'll be no credit even where it's due
Credit will continue to be conspicuous by its absence - despite the Government's efforts to get bank lending going again. Those laden with debt are in a particularly precarious position. After suffering the indignity of having its suppliers' trade credit insurance cover reduced, Premier Foods is now racing against the clock to restructure its £1.8bn debt. With bank lending almost non-existent and private equity funding drying up, other companies are experiencing serious cashflow problems. They will be forced to pull out all the stops to improve their cost base - manufacturers focusing on core, profitable brands at the expense of poorer performers and retailers boosting their working capital by reducing inventory levels.
The best most companies will be able to do is roll over their current finance, but the crunch will also encourage them to seek alternative sources of cash. Property-backed loans, leasing and equity release are all set to come into their own this year.
2 Mergers and acquisitions
There will be rich pickings for those eyeing businesses that fall into administration . But with the volatile markets making it nigh on impossible to value companies or raise finance to buy them, more conventional M&A activity is likely to slump. Over the past year, it has already fallen two-thirds on 2007 levels, according to corporate finance firm Oghma Partners. Only the cash-rich will be in the market and the big deals will be off. There could be opportunities for small acquisitions, though.
3 The nanny state
Despite the Government's renewed focus on healthy eating, it will hopefully devote most of its energy this year to resolving the economic crisis rather than nagging the food and drink industry - especially now it's got its way over tobacco. There are tentative signs its hardline stance is softening. Part of Defra's Change4Life agenda is working with retailers and manufacturers to debunk the myth that all processed foods are bad and fresh foods good, for instance. That said, the industry remains in the firing line over binge drinking, so talk of a new era of trust may be premature.
4 Plastic bags and waste
There are two areas where the Government will continue to be unrelenting in its goals – plastic bags and waste. But the message already has traction in an industry keen to cut costs and display its green credentials. The supermarkets are on target to cut the number of plastic bags by five billion by the spring and FDF members remain committed to sending zero food and packaging to landfill from 2015. Expect to see more initiatives such as Sainsbury's ‘Love your Leftovers’ as retailers capitalise on the opportunity to help consumers reduce their waste as well.
With sterling struggling to maintain its dignity against the dollar and reaching parity with the euro, it's not just people's overseas holiday plans that have been thrown into turmoil. The exchange rates have already made it significantly more expensive to import food and drink, pushing retail prices up sharply on some goods, notably bananas, rice and coffee. On the flipside, they are good news for exporters, which also stand to gain from the falling costs of raw materials for domestic production.
6 Ready meals/bottled water
Grocery is as recession-proof an industry as they come, but there is no denying some categories are going to take a pasting. Those that don't chime with today's scratch-cooking, environmentally aware, cash-conscious shopper are already suffering. Take chilled ready meals and bottled water.
Asda has admitted that sales of some of its chilled ready meals fell by 40% last year. Our Top Products Survey revealed that bottled water sales slipped 7.1% over the year [Nielsen]. Smoothies, Fairtrade and organic could also be in trouble if consumers decide the premium they command is not worth paying.
Tertiary brands will have to be on their guard as consumers narrow their focus to leading brands – or shift it to own label in an effort to save money. PepsiCo axed PJ’s Smoothies last year after it lost market share to brand leader Innocent (and despite being repositioned), while Arla pulled its Anchor Cheddar brand in a market dominated by own label. Expect more casualties in the year ahead – though, paradoxically, tertiary own-label brands could enjoy a renaissance if others follow Tesco’s lead with its new discount ranges.
Super-luxury lines are out of favour – except perhaps in wealthy pockets of London and Cheshire. Consumers will halt their self-indulgence at the premium rather than super-premium end of the spectrum. Fewer will splash out on £10-plus wines, fancy condiments or expensive cuts of meat. Those who can’t face life without lobster or Champagne will look to cheaper outlets – think Lidl rather than M&S. The price has to be right, though shoppers might make an exception for artisan products.
Tesco blamed its 2% like-for-like sales growth in the three months to 22 November on sluggish non-food sales. This year, the high street specialists will continue to struggle for survival - but that won't necessarily translate into rich pickings for the multiples. Consumers have scaled back their discretionary spend and there will be little appetite for big-ticket white goods or electronic items. With food margins hit by heavy discounting, non-food will no longer provide the ballast it once did.
10 Car usage
When petrol prices soared to record levels last summer, people started predicting the death of the car. Crude oil prices have since dipped to less than a third of their July peak and such predictions have proved premature. But many people are thinking twice before hopping in the car and heading to the local shop. When they do use the car it's more likely to be for the big weekly shop at the nearest available outlet. Retailers not viewed as destination stores, beware.