The decline of the supermarkets

The big supermarket chains are struggling. Is this a short-term blip or a long-term trend? Can the web save them? Simon Wilson reports.

How are the supermarkets doing?

Not well. Market leader Tesco recently reported a third consecutive quarter of falling UK sales, with like-for-like sales down 3.7%. On some measures, that’s Tesco’s worst performance for 40 years – and its beleaguered chief executive, Philip Clarke, predicted that trading would remain challenging “throughout the coming quarters”. Morrisons is doing even worse: it posted a 7% fall in underlying sales in early May.

And even the sector’s recent bright spot, Sainsbury’s, has just reported a second consecutive quarter of falling sales.

What’s going on?

There are two main explanations for what is happening. Firstly, large out-of-town hypermarkets are no longer so popular with shoppers. Many consumers now prefer to buy items other than food, such as appliances and clothing, online.

Secondly, the big four supermarkets (the three mentioned above, plus Asda) have been hit hard by the economic crisis and recession. That’s not because overall spending on food has slumped – it hasn’t – but because a significant number of consumers have started shopping at the discount chains, Aldi and Lidl, for at least some of the time.

Aldi’s UK sales surged by almost a third last year; Lidl’s were up 14%. In response, the big four have tried to cling on to market share by competing on price, with the constant domino effect of ‘price-matching’ promotions driving margins ever downwards.

As a result, share prices have slid across the board, with investors losing faith in the supermarkets as traditional defensive long-term plays. “Until the downgrade cycle ends, the sector is largely uninvestable,” reckons Shore Capital analyst Clive Black.

What does the future hold?

Most likely, a continuation of current trends. The big four will continue to expand into the fast-growing convenience sector and grow their online businesses. The discounters will continue to prosper too.

According to a survey by the Institute of Grocery Distribution, discount retailers will see overall growth of 65% between 2012 and 2017, while online grocery shopping is expected almost to double. But sales at superstores will grow by 6% – less than inflation.

So will the web save supermarkets?

Possibly. With their large store networks, the supermarkets are certainly well placed to benefit from the latest online trend: ‘click and collect’. This is especially true for Tesco and Sainsbury’s, which have more convenience stores. And customers won’t just click and collect for food – there’s a big opportunity for clothes and other non-food items as well.

There’s at least a chance that the supermarkets could successfully take on Amazon in the UK, thanks to their store estates. Tesco’s Blinkbox online video service also has great potential.

However, we mustn’t get carried away here. A recent McKinsey report suggests that costs for online retail, including delivery, can be high. Looking at online groceries alone, McKinsey reckons that the additional costs are simply bigger than the fees customers are prepared to pay. So maintaining margins will be a challenge.

And to make life even harder for the traditional supermarkets, McKinsey’s research shows that consumers tend to become less loyal, with an astonishing 64% switching their preferred retailers when they migrate online.

What else can supermarkets try?

Another option is to expand more aggressively into financial services. Just this week Tesco announced that its bank would be offering current accounts for the first time (a move, incidentally, which it admits will damage profitability in the short term).

There’s potential here, but investors should remember that current-account customers are notoriously reluctant to switch banks.

Perhaps the biggest opportunity for the supermarkets, especially Tesco, lies in ‘big data’. Tesco has accumulated data on the shopping habits of 400 million customers worldwide, and as data analysis becomes more sophisticated, the value of the data should rise.

Interestingly, Tesco recently bought a company called Sociomatic, which has data on 700 million online customers, so that should help Tesco’s attempt to build a strong presence online.

The big four supermarkets clearly have serious problems, but they have some assets
too. Don’t write them off just yet.

Five ways to reinvent the supermarket

Traditional supermarkets risk being squeezed out of existence, says Brad Spirrison in US magazine Retail Leader.

Here’s five ways that they might help themselves survive.

1. Provide value and fun. Store centres can focus on value; the perimeters can draw in customers with everything from children’s cooking classes to sushi bars.

2. Go green, and improve image while cutting costs.

3. Make natural and organic categories a priority; lead the way in nutritional transparency and education.

4. Add more partners to become one-stop shops: not just pharmacies and key-cutters, but childcare centres or estate agents.

5. Use new digital technology to improve marketing opportunities and improve the customer experience within the store.

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  • Pinkers Post

    The “big four” dinosaurs face extinction unless they face up to reality: The retail environment – and the grocery sector in particular – has changed dramatically over over the last 5 years. The ‘new’ retail is about establishing a well-defined niche. The customer wants to know what a ‘label’ stands for. Waitrose and Aldi have got it sussed; so have Prada and Primark. The consumer is less obsessed with ‘brand’ and ‘image’ but more with ‘DNA’ and the proof is, as ever, in the pudding: Before the great crunch, a loyal Waitrose customer would not have been seen dead shopping at Aldi. Now it’s not only ‘cool’ but also makes sense: The consumer has become by far more sophisticated. Kate Moss, another trend setter, wouldn’t dream wearing 100% Steve McQueen… how naff is that? At least the pair of socks will be sourced at Primark – just to take the ‘edge off’… The Duchess of Cambridge, too, has embraced this concept to great effect… and, of course, to the delight of both high- and low-end retail.

Of the “big four”, Tesco is the worst offender. When Clarke replaced Sir Terry Leahy in 2011 it triggered the biggest leadership change at the retailer in almost a generation. Three years on, the Tesco lifer, with 40 years’ experience under his belt, is the last man standing from the Leahy era and the sole executive director on a board where once there were eight.

The scale of the management clearout means that he will have no one left to blame for Tesco’s ongoing woes. In an entry posted 13 March 2014 Pinkers Post commented: “Tesco is clearly in trouble and it will probably take years to turn round this supertanker. Facing a battle on both the national and international front, this will be no mean feat. Furthermore, it appears the British have simply fallen out of love with Tesco. It’s just out of fashion. Pinkers suggest they hire Saatchi & Co to overhaul the brand… perhaps “Tesco is working…again”? (full entry: ‘Snap up Sainsbury’s’, pls scroll down to 13 March: http://pinkerspost.com/inout.p… )

The solution to the problem is surprisingly simple: Mr Clarke is all about the ‘old’ Tesco; he even lived (or still does?) in the same village north of London on the same street as his famous predecessor. Let’s face it…The management clearout hasn’t gone far enough and the only way to salvage this operation is for the CEO to give himself the sack!

    Nobody knows what this company stands for or, indeed, what it IS! Supermarket? Restaurant (Giraffe!)?, coffee shop chain (Harris & Hoole)?, tech retailer (Huddle), insurance company?, bank? and so the list goes on… Clarke clearly doesn’t get it: the old-style Leahy conglomerate is not the future, it’s history. Retail analysts pressing for a price war, too, don’t seem to get the message. Slashing prices and reducing profit margins is not the answer; it will only provide a short-term blip in the landscape. Radical action is needed: Break ‘em up! And Clarke is not up to the job. He is panicking, pursuing a ‘strategy’ which is well past its USE-BY (as opposed to SELL-BY) date. 

    Sir Ken Morrison, well… he HAS got it sussed… ignore his recent outburst at your peril: Brilliant and spot on: Loose your DNA and you’ll perish. Sainsbury’s, too, face massive challenges but appear to be tackling these issues, albeit rather too slowly.

    Last but not least: The “big four” have to stop running scared of Aldi et al: They will not be taking over the world and, for once, the old adage: “If you can’t beat them, join them” does not apply.

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