Retailers in the United Kingdom face formidable challenges as they struggle to keep sales on pace amid food inflation and economic uncertainty, but some indicators suggest the worst might be over.
In general, discounters and discounting have come on strong as the U.K. economy very slowly recovers from the downturn of 2008-2009, making consumers hyper-aware of costs and opportunities for savings.
"Austerity measures have influenced the behavior of households, and we have seen the return of what we term the savvy shopper who manages their weekly and monthly household budgets carefully," said Justin King, chief executive officer of U.K. grocery retailer Sainsbury's, speaking to food industry representatives in London on Feb. 15.
Savvy Shoppers Set the Tone
Today's shoppers make lists, cook more, waste less and often shop locally just as their parents and grandparents used to do, King remarked. "We are seeing coupon usage increasing too," he said. "Even the most well-off shopper wants to get a bargain and doesn't mind who knows it."
The economic situation has put pressure on grocery retailers to emphasize value. "The U.K. grocery market is increasingly competitive as the Big Four – Asda, Morrisons, Sainsbury's and Tesco – continue to improve and expand both their product offerings and store portfolios," says Cliona Lynch, a senior retail analyst at Verdict Research in London.
Consumer behavior was polarized in 2011, says Lynch, with U.K. shoppers trading up to high-end retailers and high-quality foods but also trading down to value lines and reducing unnecessary spending, trends that are expected to continue. "As shoppers trade up to high-end [U.K.] retailers – Waitrose and Marks & Spencer – and down to the discounters – Aldi and Lidl – the middle is being squeezed," she says.
Higher Prices Fuel Sales Growth
Inflation remains high within the U.K. food sector, "creating a price-sensitive consumer," Lynch says. "While discretionary income is squeezed, non-food spending is taking the biggest hit, with the food sector providing the opportunity for affordable indulgence."
In January, U.K. retail sales surged 0.9 percent from December 2011, a much stronger-than-expected increase, according to the latest data from the Office for National Statistics, and rose 1.2 percent when fuel is excluded. U.K. retail sales rose 0.6 percent in December.
However, much of the January sales growth appeared to be fueled by bargain hunters seeking to take advantage of post-Christmas sales. Non-food stores' sales volumes jumped 2.2 percent in January from December, while food-store sales were down 0.3 percent from the prior month.
Brighter Signs Ahead
Nonetheless, some analysts say, first-quarter 2012 appeared poised for better growth than in the fourth quarter, when the U.K.'s gross domestic product fell 0.2 percent and manufacturing declined 0.9 percent, according to the Office for National Statistics.
"The global financial crisis and its aftermath [have] been disastrous for U.K. output," noted Goldman Sachs economists Kevin Daly and Adrian Paul in the bank's U.K. Economics Analyst report.
While the U.K.'s outlook is still tenuous, the economic situation is worse in much of the European Union, which continues to wrestle with a debt crisis. The U.K. retains its AAA credit rating from Standard & Poor's, as does Germany, but France has been reduced to AA+ (the same as that of the United States).
The International Monetary Fund also weighed in at the end of January with an update of its economic forecast, saying the global recovery is threatened by the debt crisis, and it projected the eurozone would enter a "mild" recession in 2012. The IMF also cut its growth forecast for the U.K. economy to 0.6 percent in 2012 from 1.6 percent in its previous estimate, issued in September 2011.
According to an estimate by market monitor Kantar Worldpanel released at the end of January, the U.K. grocery market is growing at 4.2 percent per year, "below the food inflation rate as shoppers continue to seek value for [their] money."
Globally, food prices are expected to ease in 2012 from last year's high levels but aren't likely to drop dramatically. Retailers all launched sales initiatives ahead of the holidays, says John Ibbotson, a retail consultant and co-founder of U.K.-based Retail Vision in West Yorkshire, England. For example, "Tesco [the U.K.'s largest retailer] had the ‘Big Price Drop,' which was underwhelming," he says.
Tesco cut the price of more than 350 products as part of its Big Price Drop promotion, including staples like bread, meat, fish, fruit and vegetables. The supermarket chain estimated a shopping cart with 50 of the items would cut the cost of a family shopping trip from 64 British pounds (equivalent to about US$100) to 56 pounds (or about US$88).
In the U.K., "we continue to see a price war as the big four [grocery retailers] battle for market share," says Edward Garner, Kantar Worldpanel director. "Tesco's Big Price Drop has had an aggressive response from its competitors and put pressure on its market share," which had slipped to 30.1 percent as of Dec. 25, 2011, from 30.5 percent in the year-ago period.
In comments on Tesco's 2011 holiday sales, CEO Philip Clarke cited a challenging economic environment. Clarke said the retailer "made good progress internationally but despite record sales, we are disappointed with our seasonal trading performance in the U.K."
Sales at Tesco's U.K. stores open over a year fell 2.3 percent (excluding fuel and VAT) in the six weeks ending Jan. 7, well below expectations despite a 14 percent increase in online sales. "A disappointing performance at Christmas indicated the global retailer is struggling somewhat in its home market," says Verdict's Cliona Lynch.
Tesco began promoting a "clubcard" loyalty voucher program in January, which some analysts saw as a move away from its Big Price Drop strategy.
With global sales of 67.6 billion pounds in fiscal 2011 (a period ended on Feb. 26, 2011), Tesco ranked third in size worldwide among retailers in 2011, according to an annual list compiled by Deloitte Touche Tohmatsu and Stores magazine and published in January 2012. That put Tesco behind No. 1 U.S.-based Walmart and French retailer Carrefour SA, but ahead of German-based Metro AG.
But Tesco's share of the U.K. market lost momentum compared with Asda, which is owned by U.S. retailer Walmart. Asda saw a jump in market share to 17.5 percent in the 12 weeks ending Jan. 22, from 16.9 percent in the same period a year ago, although the gain was accelerated by the final conversion of Netto stores to Asda supermarkets, Kantar says. Asda acquired Netto's U.K. budget stores in 2010.
Asda and German-owned Aldi's are essentially low-cost discounters. "Their basic message is price," Ibbotson says. "But they have done a lot of work improving quality."
Asda Plans Expansion
Asda plans to create about 5,000 jobs in the U.K. this year as part of an expansion, according to recent reports by the British Telegraph. The company is expected to open 25 new stores and three depots, and extend and refurbish 43 existing stores. It currently employs about 180,000 people in the U.K. at 528 stores.
That number is dwarfed by Tesco, which has 2,715 stores in the U.K. and a staff of 293,676. Worldwide, it has more than 5,000 stores, including outlets in Eastern Europe and Asia.
Since Tesco has a presence in every postcode in the U.K. as of September 2011, "continued expansion has become less effective in growing sales," Lynch says. In 2012, Tesco plans to put money into improving the existing portfolio of stores rather than investing in new openings, "in particular in larger out-of-town locations where non-food sales are suffering," Lynch says.
At the top end of the middle market sits Sainsbury's, Lynch says. "In 2011, a rebrand under ‘Live well for less' resonated well with customers who wish to continue to indulge in and enjoy food despite an austere climate and low consumer confidence," she says.
A "Brand Price Match" helped Sainsbury's year-end performance and enabled it to grow its share to 16.7 percent as of the 12 weeks ended Jan. 22, the highest for the company since March 2003, says Kantar's Garner.
Competing on Price
Customers love the Brand Price Match, Ibbotson says. "Sainsbury's had always been thought of as a higher-quality, high-priced store, but the coupon and the receipt showed them their savings," he says. Sainsbury's comparable store sales excluding gas rose by 2.1 percent in the 14 weeks ending Jan. 8 from a year earlier. Online sales rose 20 percent.
Morrisons, the smallest of the U.K.'s Big Four grocers, has the most to gain in 2012, Lynch says. "The retailer has expanded into convenience stores in 2011 and will be looking to roll these out further in 2012. A focus on fresh produce is highlighted by a vertically integrated supply chain," she says. It also has partnered with U.S.-based FreshDirect on a new online model slated for launch in 2013, Lynch says.
Whether their proposition revolves around a price match, an expanded product portfolio or a commitment to freshness, U.K. grocery retailers are under pressure to deliver value consistently. One winner surely will be the savvy shopper.