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.

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?

falling UK sales

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

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What's going on?

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?

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?

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?

There's potential here, but investors should remember that current-account customers are notoriously reluctant toswitch banks.

Perhaps the biggest opportunity for the supermarkets,especially Tesco, lies in big data'. Tesco has accumulateddata 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 attemptto build a strong presence online.

The big four supermarkets clearly have serious problems, but they have some assetstoo. Don't write them offjust yet.

Five ways to reinvent the supermarket

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.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.