Food retailers – time to take stock

The results season is now well underway for the UK food retailers. The Co-operative Group, Tesco and Morrisons have all reported excellent figures. We are still waiting for Sainsbury’s and the next announcement is due from Asda soon. Kantar data is helpful as well, showing that the growth at Aldi and Lidl is slowing down to new store opening rates.

Latest figures

Unfortunately there is no data for Aldi and Lidl as they never report their results (Aldi files accounts at companies house, Lidl does not). Kantar data gives Aldi a market share of 6.8% against 4.9% for Lidl. Both are still growing, though not as fast as they were.

Figure 1: Leading food retailers: Latest sales performance, 2016-17
Company Period Like-for-like sales growth Total sales growth Notes
Asda Q4 to 12.16 -2.9% na
Co-op Year to 1.17 +3.5% +1.0%
Morrisons Year to 1.17 +1.7% +1.2% Lfl ex fuel
Sainsbury’s Year to 2.17 -0.5% Lfls +0.1% ex exceptionals
Tesco Year to 2.17 +0.9% +0.6% Ex fuel
All food retailers 2016 +1.9% ONS data
Source: Office for National Statistics/Companies/Mintel

Co-op staging a strong recovery

The only one of the majors to have come close to outperforming the ONS was the Co-op. It failed to do so because it has been closing stores as part of its strategy of concentrating on convenience stores. But the performance is impressive nonetheless. The company has seen a remarkable turnaround under Richard Pennycook, though he has now moved on, probably to his next turnaround challenge.

Tesco recovery no flash in the pan

Tesco is a little behind the Co-op in its recovery, but it is in a more challenging area of the market. Superstores are still losing market share, while the Co-op, in convenience, is in the sector which is growing.

But Tesco has also been fortunate in its choice of new Chief Executive to steer it out of a difficult time. Dave Lewis’s achievement is all the more impressive because the business is so much bigger. But here too, it comes down to concentrating on the basics – prices, ranges, store standards, service levels. He has also brought the balance sheet under control. Capital expenditure is much lower and the group is cash generating. UK profits grew by a quarter in 2016/17 and it is well on its way of achieving its target operation margin of between 3% and 4%.

Morrisons recovery also looks soundly based

Morrisons lives somewhat in the shadow of Tesco, but here too there has been a remarkable turnaround. Sales have grown again through a programme of concentrating on the basics and of achieving a consistent market stance. Morrisons is back to where it was before the Safeway acquisition – pitched at the lower mass market with a great value, fresh food led offer. It has also started to be more innovative and its deal with Amazon is bold, to say the least.

Sainsbury’s lagging behind

It is not possible for all stores to outperform at the same time and Sainsbury’s performance has been weak. Perhaps it is no more that the struggle of achieving growth after several years of consistent growth ahead of its peers. The Co-op, Tesco and Morrisons are all coming from a low base. Certainly Sainsbury’s seems to be doing the right things with an emphasis on product innovation, a move to everyday low pricing and an end to the heavy reliance on a high-low promotional strategy.

The worry about Sainsbury’s is Argos. Sainsbury’s bought it because it finds that a strong non-food offer drives footfall. Therefore, hopefully, the presence of an Argos concession in-store should do so as well. There is evidence that this is happening. What is not clear is that Sainsbury’s should have bought the business to achieve that result and risked a major diversion of management time and effort in turning it around. Sainsbury’s could have achieved the same result through a commercial agreement.

Asda neglecting the basics

Asda is the worst performing business at the moment. Its Q4 performance was the best for a couple of years, though whether that is a pointer for future performance or not is too early to tell. There seems to have been less discounting in general over Christmas – Tesco gives that as a reason for its weaker Q4 sales growth, and if Tesco’s sales growth was weaker, that would have helped Asda.

There has been a change of management and published comments suggest that there is a recovery programme in place. The business needs to spend more on its stores and invest in better service, especially better availability.

Where next?

We are cautious about the prospects for consumer spending through the second half of 2017. It looks as if real incomes will be falling as inflation rises. That makes us especially cautious about the prospects for Christmas.

The superstores continue to lose market share. We think this is driven by the movement of population back into inner cities. We do not think that it has anything to do with the growth in real incomes, so we do not expect to see any significant move back to superstores if incomes come under pressure. In fact, rising fuel prices are likely to accelerate the shift.

The growth area of food retailing is and will continue to be in convenience (see the forthcoming Convenience Stores report - UK, April 2017). That is why we must be most optimistic for the prospects of the Co-op. It is primarily a convenience retailer and it is on a strong recovery path as well.

Morrisons and Tesco are both moving in the right direction. It looks as if both have achieved a pricing position where they can co-exist against the discounters and both have improved their businesses considerably. If Asda achieves a recovery (and there is no reason why it shouldn’t) then it will take more from Morrisons and Tesco than it will from Sainsbury’s and the Co-op. But Sainsbury’s needs to prove that there is no underlying problem behind its recent weakness.

Innovations

Online is growing, but it only takes a small share of the food retailing and the vast majority is controlled by the majors anyway. Ocado is the only independent business of any size and it still has links with Waitrose. (See Online Grocery - UK, March 2017)

Amazon is making a play for the food retail market.

  • It is offering a one hour delivery service for Prime members in conjunction with Morrisons (Morrisons at Amazon), initially in London and Hertfordshire, though the area served is gradually expanding.

  • Amazon Fresh combines a delivery service for local retailers with a grocery offer for which Morrisons acts as wholesaler, again only for Prime members but with an additional subscription, but again over an expanding area.

  • Amazon even has an experimental shop in Seattle where members will be able avoid a check out altogether as their account will be debited as they leave the store. At present this is for Amazon staff only and the full opening has been deferred.

Amazon is the “elephant in the room”. It is feeling its way cautiously into the sector, but is a long way from a full commitment to it.

The long term trends in food retailing that have been in place since the war are reversing. The superstores that were so dominant are being challenged. There is more innovation in the sector than we have seen for years. That is not to say that the superstores will disappear – their share is too large for that – but they need to find ways to re-establish a reasonable level of profitability because the trends away from superstores and towards convenience, will continue.

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