“Independent supermarkets make up just 1.8% of the market, compared to a whopping 27.8% for Tesco alone”
Supermarket chains are a relatively recent phenomenon. Just 45 years ago, the market was dominated by small independent stores, and in 1973 the largest chain was Sainsbury’s, with about 8% of the market. Fast-forward to 2017, and independent supermarkets make up just 1.8% of the market, compared to a whopping 27.8% for Tesco alone.[1] However, the small store concept is back in fashion as the Internet changes our buying patterns yet again.
Throughout the 80s and 90s, the movement was towards big, out-of-town retail experiences; school trips to France were sure to take in the vast hypermarchés, to gaze in awe at a mind-blowing array of products. Then, in the mid-noughties, as our brains began to be rewired by smartphones and the Internet, our shopping habits started to change again. The idea of meal plans and a weekly shop was replaced by enough imagination to plan each evening’s meal at the last minute, with ingredients picked up from the local convenience store on the way home from work. Which neatly takes us back to the 1970s, albeit that these convenience stores are now owned by big supermarket retailers. There has been a high street land grab by the larger supermarkets that is revitalising, if formulaic. At the moment, it looks like there’s one clear winner that’s hoovering up the convenience/local sector, and that’s Tesco – and they might have just played their trump card.
In early 2017, Tesco announced the acquisition of Booker, the cash & carry brand that also own the Budgens and Londis stores. This will mean that Tesco will be able to add another 1,800 convenience stores to their already 2,500-strong portfolio. They’ll also control the supply chain of goods to another 19,000 independent retailers who rely on the Booker cash & carries for their stock. A win-win for big brand versus local store.
“The major players in the UK sector are looking to evolve in order to thrive”
Some of the major players in the UK sector are looking to evolve in order to thrive (and in some cases just survive), and each is taking a different route. Sainsbury’s is becoming a mini-mall by adding, purchasing and aggregating retail brands (Argos, Habitat and Lloyds Pharmacies) for a multi-channel experience. Waitrose, meanwhile, has become reassuringly expensive, the bastion of any aspirational middle-class shopper.
Others seem to be stagnating. Asda and Morrisons are struggling to find their own way as they are pushed out of the lower end of the market by the rise of the German discount chains, Aldi and Lidl. Asda, owned by US retail giant Walmart, have now suffered nine consecutive quarters of decline, while Morrisons has tried tying up with Ocado and Amazon to become more online focused. Both, however, seem to be lacking a clear growth strategy.
“Aldi is able to charge on average almost £10 less for the same 33 products as its larger rivals”
So, why have the discounters done so well, and why are the Big Four unable to compete? Firstly, by keeping prices low, Aldi is able to charge on average almost £10 less for the same 33 products as its larger rivals. How? Well, they carry fewer products so purchase more in bulk. A typical discounter will carry between 1,200-1,700 different items; this is compared to approximately 27,000 items for an Asda or Tesco. They won’t sell five different brands of spaghetti, but just one, allowing them to push their suppliers hard. What the discounters have done extremely well is to shake the negative connotations of low price equalling low quality. Products from smoked salmon to sparkling wine often win best in class in both trade and consumer competitions, as well as press articles – so much so that The Grocer Awards, which looks at over 1,000 own-label products from the supermarkets, have awarded Aldi and Lidl gold medals in 49% of the categories. This also sees them scoring highly in customer satisfaction surveys, defeating demographic stereotypes to secure a customer base that’s equally weighted between the wealthiest AB income group and the hard-up DE group. And the discounters are growing. They are both actively looking to expand and build their bricks and mortar businesses, while the Big Four slowly retrench.
“The UK, according to Kantar, are second only to South Korea in the proportion of groceries purchased online”
But the discounters don’t do online, or not yet, anyway. This is where the Big Four and Ocado have room to take back market share. The UK, according to Kantar, are second only to South Korea in the proportion of groceries purchased online, with ecommerce making up 7.3% of the market. The British consumer buys groceries with more regularity online, 15.4 times a year, and the average basket is $64.90 more online than a trip to a store. And once again, it’s Tesco that’s leading the charge with 35% of the 9.9 billion pound market. Ocado, who are a pure-play online outfit, are making large strides, but continued investment in technology is hurting their balance sheet, and currently they hold only a 13% market share. The big question on everyone’s lips is, “what are Amazon going to do?”
Signalling their intent to hit the grocery market hard, Amazon recently announced the acquisition of US upmarket chain Wholefoods, who dub themselves “America’s Healthiest Grocery Store”. They already have two forays: Amazon Fresh, which delivers same-day groceries in major cities, and Amazon Go, whose fledgling store rolled out in Seattle in 2016. Amazon Go has no checkouts – customers simply remove items from the shelves and place them into their bags, all tracked via smartphones and computer vision and sensors. The US online grocery market is relatively nascent compared to the UK, but the potential is extraordinary, and Amazon has the logistics network to become a large player extremely quickly.
The supermarket sector is undergoing a rapid period of change, with the traditional bricks and mortar supermarkets having to evolve to meet new challengers and the increasing digitisation of the retail sector as a whole. As such, we have identified supermarkets as a long-ranging theme that can underpin a strategic approach to investment.
[1] Kantar Worldpanel – 2017
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