Of all retailers, it could be said that lockdown has provided UK food retailers with an opportunity to build a war chest that will help fuel a price war aimed at significantly slowing the growth of the discounters.
Essentially, in an unprecedented 15-week lockdown, UK food retailers have benefited from a business rates holiday – ‘providing savings of well over £1bn across the industry’ (FT 03/07/20) – and a virtual elimination of promotions – ‘to avoid panic buying’ – but with a net effect of enabling sales at normal retail prices, yet achieving increased sales turnover, thereby providing greater than normal retail margins.
Incidentally, even greater growth has been achieved in their online business, adding to scale advantages in terms of buying, but resulting in increased costs in terms of manpower, and some profit dilution because of the high costs of online fulfilment. Whilst business logic normally advises the pursuit of growth, moving more sales online can dilute the profitability of the overall business. Hence the need for gaining share at the expense of traditional bricks & mortar competitors.
During lockdown, food retailers have made these gains in spite of the social distancing restrictions placed on shopping:
- Queueing outside, despite the weather
- Shops designed for ‘full occupancy’ having to cope with greatly restricted numbers of shoppers instore
- Sanitising of trolleys/baskets for every shopping trip
- Pressure to speed-shop (no browsing/impulse i.e. whatever happened to ‘70% of the purchasing decision being made instore’?
- ‘Directionalised’ aisles, ‘regimenting/removing my shopping sovereignty’
- Coping with and being delayed by other shoppers ‘dithering’ in the aisle
- Being subject to shop staff that think the job is maintaining social distancing regulations rather than helping shoppers buy
Despite the imposition of these ‘shopping restrictors’, the mults and other food retailers have managed to grow sales as consumers responded by shopping less frequently but buying more on each trip, given their need to eat, albeit at home rather than in cafes and restaurants. In fact, the 100% lockdown in hospitality has also resulted in the transfer of a high proportion of foodservice ingredients to the retail food channel, again adding to volume sales.
One major difference in the past 15 weeks has been the emergence of the super-savvy consumer, unwilling to accept anything less than demonstrable value for money. Having had an unprecedented opportunity to hone their home-cooking skills and thereby become hyper-conscious of ingredient cost and quality, they have enhanced their social networking skills. This means they can exert more influence in the market via the ‘tell a friend’ mechanism. In other words, ‘please me and I will tell one friend, disappoint me and ten will hear about it’. Add social networking and multiply this impact by 100, or even 1,000 to appreciate that, with the benefit of price comparison tools, the coming price war will be monitored by experts, that vote with their feet. In other words, shrinkflation or any other attempts at masking price increases or funding price cuts will be at great risk to all stakeholders…
Whilst UK food retailers have historically enjoyed net margins of up to 5%, increased competition from the discounters and regulatory pressure have helped to reduce margins to ‘normal’ levels in global retail. So while the new battle with the discounters may start as a price war to end all price wars, it may be worth bearing in mind that the discounters have over 40 years’ experience of narrow margin retailing, in far more competitive environments…
Whilst UK food retailers have had to incur increased manpower costs to cover absenteeism, it could be said that they are well funded for price fighting. In addition, press reports indicate that suppliers are being invited to help fund an EDLP-based price war with the discounters via supply cost reductions and part-funded by reduced promotions.
Given that Wow-diluting EDLP over six months can result in loss of excitement in store, it is probable that it may be necessary to return to on-shelf promotions in order to rebuild excitement in the aisle.
In other words, back to business as usual, the new norm…
NAM Implications going forward with the benefit of hindsight:
- Alas, from a mult’s POV, this was not to be, in that most retailers ‘returned’ the state help, whilst those that kept the money suffered damage to their consumer franchise.
- i.e. the discounters grew regardless, perfectly positioned for the austerity of the New Norm…
- Despite a virtual elimination of promotions, ‘to avoid panic buying’ meaning sales at normal prices, should have translated to the bottom line, but failed to do so.
- Retailers’ online growth in Lockdown was not only at the expense of their traditional business…
- …but carried with it the extra burden of the extra cost of online fulfilment.
- Meaning the more their online grew, the more pressure on their bottom line…
- The above social distancing regulations prevented retailers from optimising the Lockdown opportunity.
- All told, a missed opportunity for the mults.
- Whilst the discounters grew share at their expense, a position unlikely to be reversed.
