Inconvenient competition

This is an incredibly tough time for retailing, especially grocery retailing. The coming period will be difficult for independent co-operative societies, for the Group and the many other co-operative food retailers, especially those in urban areas.


The largest UK grocery retailer is Tesco – and it has just reported its worst trading figures in 40 years. On a like-for-like basis, sales were down by 2.9% in the most recent quarter and down by 3.7% in the year.  The retailer has implicitly recognised that many of its older stores are showing their age and lack of investment, which has led to it undertaking a significant, £1bn, programme of refurbishment.  It has refreshed a hundred stores (out of its portfolio of nearly 7,000 outlets) in the last quarter and is substantially speeding-up its programme of store refurbishment.  Tesco is also cutting prices both in-store and for its online deliveries in order to respond to enhanced competition.


Tesco chief executive Philip Clarke warned investors that there would be no quick recovery and painted a downbeat picture. “I have not seen a quarter’s like-for-like sales like this before, that I can remember,”  he said. “I have never seen a period of such intense transformation, either, for the industry.”


The picture is arguably even worse at the UK’s fourth largest grocery retailer, Morrisons. Turnover is down by 2% for the full year ending February 2014, with like-for-like sales falling by 2.8% and pre-tax profits down by a significant 13%.  Apparently the company’s grandee Sir Ken Morrison swore and shouted at the current chief executive, Dalton Philips, at the just held AGM.  Some 25% of investors voted against the executives’ remuneration package – a very unusual and very large rebellion.


Philips told investors that the company was adopting a substantially revised business strategy. “We are significantly reducing our cost base and will invest £1bn into our proposition over the next three years, to improve our value even further and to defend and strengthen our competitive position,” he said. “Customers will see this in our stores as well as in our fast growing online and convenience offers. At the same time we will exit non-core activities, significantly reduce our capital expenditure and deliver improved operating cashflow and return on capital employed.”


Both Tesco and Morrisons are focusing on four strands in their attempts to revitalise their operations and return to growth. They are improving the look of their existing retail outlets.  They are cutting prices.  They are focusing on online deliveries – Tesco are improving theirs, while Morrisons only recently launched its first ever online order service for home delivery.  And both are expanding their presence in the convenience store market.


Part of this strategic revamp admits an error in operations in recent years. And it is an error that co-operative societies were early to spot when they moved out of hypermarkets – withdrawing from a damaging competition that they were mostly losing – and focused instead on smaller retail outlets, the convenience stores.  The recession has accelerated an existing trend of consumers moving away from out-of-town shopping for groceries.  The out-of-town environment had become too crowded, anyway, as the co-op societies had spotted.


A new trend has emerged for consumers to buy in town and city centres, backed by more orders being placed online for home delivery. Several factors lie behind this change in shopping habits.  Higher fuel costs have deterred shoppers from travelling several miles to their nearest hypermarket – even Tesco’s highly competitive petrol pricing has not been enough to overcome this.


Just as significant has been the desire in the recession to avoid wastage and to shop for what is immediately needed. This means smaller shops, buying on the day for the day.  As a result, less food is thrown away and shoppers only spend money when they need to, improving their personal cash flow.


But one of the biggest factors shaking-up the grocery market has been the entry and expansion of the major German, privately owned, chains Lidl and Aldi. While the shop displays are basic, the units are clean and smart.  Prices are keen and there are abundant special offers, which can range from cheap ski jackets to ultra low cost computers.  Lidl and Aldi have been gradually eating up their competitors.


Until recently, Lidl and Aldi have tended to focus on medium sized, edge of town stores. But they are also adjusting their trading strategies to reflect changing buying habits.  As a result, both the chains are taking up a number of city and town centre, convenience store, units, while still maintaining a keen pricing policy.  This plays to the ‘time poor’ worker, who wants to shop for the evening meal ingredients either at lunch time, or on the way home.


This changing face of the grocery trade is a threat not only to Tesco and Morrisons, but also to the co-operative societies. The competition battle ground has moved from out-of-town to the high street.  Across English cities you are likely to trip over convenience stores with the names Tesco, Sainsbury’s, Asda, Morrisons, Aldi and Lidl, as well as those of the Co-operative Group, local co-operative societies and independent retailers using franchise brands including Spar and Nisa (a marketing co-operative).  It is a crowded environment, in which price, location, smartness, cleanliness and style will all play a part in determining which brands will survive.


The Co-operative Group has said that it is fighting back against convenience store competitors by lowering prices of basic products, including bread, milk and bananas, at a cost of £100m. Morrisons, meanwhile, is to cut profit targets by £1bn, to cut prices.  Tesco is similarly focusing on winning sales through low prices.


But the market place is a difficult one in which to win. One academic business case analysis of Aldi suggests that its UK strategy is to win turnover, rather than to generate profits in the short-term.  Aldi is playing the long game of attracting shoppers for occasional shops and then to encourage them to shop at their stores with increasing frequency.  As one of Germany’s most profitable businesses, Aldi can afford to be patient.


The business strategy of Lidl is less clear – its UK chief executive recently resigned over “unbridgeable” differences with the group’s owners on business strategy. This may be related by moves in the past few years to sell more high end goods, such as quality wines and high value luxuries.


While there are uncertainties ahead for all grocery retailers, a few facts are clear. Only one of the big four UK retailers – Asda – is increasing turnover and market share.  That may reflect the balance sheet strength, available economies of scale and market knowledge of its owners, Walmart.  And the other businesses with a growing presence, Aldi and Lidl, are also using their international experience.  Given Tesco’s difficulties in some of its international markets, it seems that the UK may more susceptible to learning from elsewhere, than in exporting our model to other countries.


Traditional UK grocers will have to adapt to survive and continue to innovate. The convenience store market place is becoming very crowded.

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