‘When the going gets tough, the tough get going’ is a good way to describe how supermarkets responded to the COVID-19 pandemic and, indeed, how they are responding to the impending recession. Memories of the last recession and the impact it had on the grocery landscape are still fresh in grocery retailers’ memories. They have learnt from it and they are adjusting accordingly.
As many others have said, this year has been truly unprecedented as coronavirus gripped the world, forcing global lockdowns, panic buying and universal uncertainty. However, even before COVID-19, suppliers in the grocery sector were facing unique pressures. This has – and will continue to be – the toughest 18-month period that food and drink suppliers have ever faced.
Brexit, Then COVID
Of course, the foundations for this difficult period were laid back in March 2017 when Theresa May triggered Article 50 of the Lisbon Treaty and confirmed the UK’s intent to leave the EU.
Brexit brought huge uncertainty and a requirement to stockpile as the UK’s original leaving date got closer. This simply flagged the problem that there is not enough warehouse space in the market to accommodate stockpiling. We live in a ‘just in time’ world, where grocery retailers require long shelf life in products, and the UK’s grocery distribution network is built around this premise.
The industry temporarily overcome that hurdle, but then jumped from the frying pan and into the fire as COVID-19 took its grip. Panic buying and stockpiling from consumers, coupled with the closure of pubs and restaurants which forced people to cook and eat more at home, meant grocery demand shot up almost 17% in the 12 weeks to 12 July 2020, according to Kantar. To put that in context, Statista reports that the grocery market grew by about 1% in the whole of 2019.
Changing Habits
This huge spike in demand meant the grocery retailers dropped promotions and rationalised. According to the Grocer/Assosia, promotions halved. Whilst that was fine for the suppliers, in principle, the multiples also significantly rationalised the number of products/SKUs they sold.
Crucially, consumer shopping habits changed. It doesn’t take an expert to understand why consumers were no longer searching out the gluten-free couscous or quinoa with red rice; they wanted beans and lots of them; as well as toilet roll, dried pasta and flour of course, as we all discovered from the empty shelves. The beans did not need to be flavoured, just plain old beans. Niche products tend to be supplied by smaller suppliers who have the least bargaining power so rationalisation in the marketplace left the smallest players in the market as the most exposed.
New Threats
The panic buying may have subsided and many niche products have now returned to the shelves, but a new cloud sits above suppliers and in truth, it affects big and small suppliers alike.
The multiples are determined to prevent Aldi and Lidl from gaining as much ground as they did in the last recession. We all know shopping habits changed as a result. In 2007, Aldi and Lidl had 2.5% and 2.2% of the grocery market respectively. Now those figures are 8% and 6% as the German discounters have stolen market share predominantly from the Big Four, which are all down on their 2007 market share figures.
This time around things are different for two reasons. Firstly, online grocery sales grew by 91% in the 12 weeks to 12 July according to Kantar. Online grocery, at the last count, had doubled from 7.4% to 13% of all grocery sales and although Aldi has recently started a trial, neither Aldi nor Lidl are big players in the current online growth.
However, Aldi and Lidl are known for their market-leading prices – but perhaps not this time, as the second factor for suppliers is discounting. Tesco has said it will do an ‘Aldi Price Match’ to 500 branded and own label products. Morrisons have stated it too will cut prices on over 400 products, whilst Asda has said it will cut the prices of 1,000 products and Sainsbury’s will follow soon I’m sure.
Looking Forwards
Reducing prices can only be done if the suppliers and supermarkets trim their margins. The multiples hold all the cards so the suppliers will have some tough negotiations ahead of them. However, both parties should remember that it isn’t 2008 anymore.
In 2010 the Groceries Supply Code of Practice came into force and I believe the new Groceries Code Adjudicator (GCA), Mark White, has sharper teeth than his predecessor. The multiples must remember their obligations and they can only ask for so much, which will be a welcome boost for suppliers.
A welcome boost, of course, which might yet be tempered by Brexit. In the uncertainty over the withdrawal agreement, suppliers must bear in mind that if we do not agree a deal with the EU then commodity prices will increase and if they have agreed prices with the grocery retailers, they will not be able to increase them. As I said before, this is the toughest 18-month period for grocery suppliers.
