UK grocery plc is being pushed into a long-term scenario of lower value growth, with stealing volume from rivals now the only way to get ahead.
Elaine Watson reports
On the face of it, UK grocery plc might appear to be in a fairly healthy state, showing steady, if unspectacular growth, says IGD. Dig deeper into the data, however, and it’s clear that growth is becoming increasingly reliant on short-term bursts of inflation and extensions into non-food ranges.
Despite a couple of inflationary blips in 2001 and 2003, says Grocery Retailing 2004, we are witnessing a long-term shift to lower value growth, driven by fierce price competition, restrictions on store openings, more eating out, slowing population growth and the maturity of key grocery categories.
Worryingly for suppliers, commoditisation is now affecting an increasing number of product groups as buying power is consolidated into fewer hands, global sourcing is stepped up and margin-eroding online auctions are extended across all product categories, adds the report.
“The strong promotion of EDLP by the leading grocery retailers has not only held price inflation at a level below the general rate of inflation, but may in the long term have a more insidious and damaging effect.”
In such a climate, suppliers are under constant pressure to hold or cut prices,
according to IGD. “Suppliers find themselves pressurised by retailers to bring new products to market while simultaneously reducing prices, requirements that are mutually opposing since new product development only makes financial sense if it will deliver major financial returns.”
However, the maturity of the market is such that the only meaningful way to drive growth will be stealing market share from rivals.
In short, says the report: “It is almost impossible for any retailer to save money or grow margin fast enough to compensate for the effects of adverse differential inflation [where growth in costs exceeds growth in prices]. Volume and market share growth will be the key.”
And this means more price cutting and further market consolidation. The former will be funded by suppliers, supply chain efficiencies and using profits from non-food to subsidise food price cuts.
The latter will almost certainly mean more acquisitions in the convenience sector given buying c-stores is the best way to boost share without attracting regulatory interest.
So how well positioned are the leading food retailers to prosper in this climate?
Although Sainsbury is doing pretty well on the acquisitions front, picking up Bells and Jacksons, it is also in the unenviable position of having the lowest operating margins of the top players combined with the weakest growth, says IGD.
Moreover, continued supply chain problems mean that Sainsbury is not in the ideal position to trade from its stores more aggressively.
Although Asda has performed well, an enlarged Morrisons remains a threat longer term, while planning restrictions and its reluctance to enter the convenience market limit Asda’s growth opportunities in food.
Tesco, meanwhile, is the only retailer to achieve the holy grail of improving both market share and profitability. And it still has the best operating margins in the grocery retail business.
Morrisons might well have the last laugh, however. Investors that have lost faith are reminded that at 9.3%, Morrisons like-for-like growth was better than Tesco’s.
Moreover, at £399m, the value of Morrisons’ like-for-like growth in 2003-4 exceeded the total value increase at Sainsbury (nearly three times Morrisons’ size) over the same period.
If Morrisons can achieve the same results at Safeway, Sir Ken could yet be laughing all the way to the bank - even if it takes him a bit longer to get there than some investors thought.
Elaine Watson reports
On the face of it, UK grocery plc might appear to be in a fairly healthy state, showing steady, if unspectacular growth, says IGD. Dig deeper into the data, however, and it’s clear that growth is becoming increasingly reliant on short-term bursts of inflation and extensions into non-food ranges.
Despite a couple of inflationary blips in 2001 and 2003, says Grocery Retailing 2004, we are witnessing a long-term shift to lower value growth, driven by fierce price competition, restrictions on store openings, more eating out, slowing population growth and the maturity of key grocery categories.
Worryingly for suppliers, commoditisation is now affecting an increasing number of product groups as buying power is consolidated into fewer hands, global sourcing is stepped up and margin-eroding online auctions are extended across all product categories, adds the report.
“The strong promotion of EDLP by the leading grocery retailers has not only held price inflation at a level below the general rate of inflation, but may in the long term have a more insidious and damaging effect.”
In such a climate, suppliers are under constant pressure to hold or cut prices,
according to IGD. “Suppliers find themselves pressurised by retailers to bring new products to market while simultaneously reducing prices, requirements that are mutually opposing since new product development only makes financial sense if it will deliver major financial returns.”
However, the maturity of the market is such that the only meaningful way to drive growth will be stealing market share from rivals.
In short, says the report: “It is almost impossible for any retailer to save money or grow margin fast enough to compensate for the effects of adverse differential inflation [where growth in costs exceeds growth in prices]. Volume and market share growth will be the key.”
And this means more price cutting and further market consolidation. The former will be funded by suppliers, supply chain efficiencies and using profits from non-food to subsidise food price cuts.
The latter will almost certainly mean more acquisitions in the convenience sector given buying c-stores is the best way to boost share without attracting regulatory interest.
So how well positioned are the leading food retailers to prosper in this climate?
Although Sainsbury is doing pretty well on the acquisitions front, picking up Bells and Jacksons, it is also in the unenviable position of having the lowest operating margins of the top players combined with the weakest growth, says IGD.
Moreover, continued supply chain problems mean that Sainsbury is not in the ideal position to trade from its stores more aggressively.
Although Asda has performed well, an enlarged Morrisons remains a threat longer term, while planning restrictions and its reluctance to enter the convenience market limit Asda’s growth opportunities in food.
Tesco, meanwhile, is the only retailer to achieve the holy grail of improving both market share and profitability. And it still has the best operating margins in the grocery retail business.
Morrisons might well have the last laugh, however. Investors that have lost faith are reminded that at 9.3%, Morrisons like-for-like growth was better than Tesco’s.
Moreover, at £399m, the value of Morrisons’ like-for-like growth in 2003-4 exceeded the total value increase at Sainsbury (nearly three times Morrisons’ size) over the same period.
If Morrisons can achieve the same results at Safeway, Sir Ken could yet be laughing all the way to the bank - even if it takes him a bit longer to get there than some investors thought.
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