Is non-food a distraction or a lifesaver for supermarket bosses?
The supermarkets have become major players in non-food and they are still growing. Is boring old food losing out, or are the clothes and DVD players piggy-backing on the attractions of the weekly grocery shop? Chris Lyddon reports.
The Institute of Grocery Distribution's research creates a worrying picture for the food industry, James Walton senior economic analyst at the IGD told just-food. "One of the things we discovered was that people most enjoyed shopping in the non-food part of the supermarket," he said. "It is good news if you've got a non-food area."
The challenge was how to make the grocery section rewarding enough for consumers to enjoy that as much? "You can do things like sampling, or having indulgence items or showing people what the British food industry has to offer," he suggested.
Exciting grocery products were not necessarily in the premium category. "Look at children's foods," he said. "They are not expensive. It doesn't necessarily have to be expensive."
Similarly many of the non-food products being sold by the supermarkets were low in price. "A lot of the non-food is actually de-premiumised," he said. "Things like CDs or DVDs are now becoming non-luxury products. They're almost cheaper than food."
The main draw
It was not necessarily obvious whether the non-food was helping food sales, or the other way round. "It works both ways," he said. When the supermarkets first started selling non-food items they had seen it as an extra draw. "It's hard to give an extra 10% off a can of beans because the market is so tight, but if you get 10% off a TV set then it gets people into the store," he said.
Non-food has now become something much more. "Tesco, for example, would see themselves as offering a lifestyle solution with grocery, non-food, and services," he said. Tesco is reported to be thinking about standalone fashion stores, a move Wal-Mart's Asda chain has already made with its George brand. It launched its first non-food standalone store, Homeplus, in Manchester at the end of September.
Walton noted that the big supermarkets were offering non-food both in store and online. "Online you don't have any space constraints," he said.
A surprise for the specialists
The entry of the supermarkets caught some of the big traditional retailers unawares. "A lot of high street non-food specialists didn't see it coming for some reason," he said. "It was very easy for the specialists to kid themselves that the supermarkets couldn't match them."
They had not thought the supermarkets would make such a good job of non-food. "The supermarkets were better than they expected," he said. "That caught them out. They overestimated how much specialism was needed." With things like hi-fi equipment, the supermarkets might not be able to offer the best, but they could give their customers what they wanted. "It's not as good as the specialists but it's fit for most people most of the time," he said.
The advantage for the customer was higher quality goods at lower prices. "You can get away with making fewer compromises," he said, noting, for example that Tesco is selling GBP20 (US$34.60) cashmere jumpers. "The consumer previously would have sacrificed £100 for cashmere," he said.
It wasn't a case of supermarkets looking at non-food or food. "If you're a supermarket you look at margins across the store as a whole," he said. "Margins are hugely variable depending on what the retailer is trying to do. If you sell only clothing you have much less flexibility. A supermarket by definition is a versatile entity."
Nick Gladding, senior retail analyst at retail experts Verdict felt that non-food was making a big difference to the supermarkets. "A lot of the sales growth is coming from non-food and also the profit growth as well," he told just-food. "Non-food is higher margin than their core products."
"It's been seen as instrumental in helping Tesco increase their sales and profits," he said. "It has also been widely seen as one reason why Sainsbury has underperformed. They've been seen as lacking in non-food."
According to Verdict non-food sales in grocers have increased by 60% in the last five years, but this is only the start of what they can do in non-food. It put non-food sales in the grocers at GBP13.5bn in 2004. They are expected to be selling more non-food than department stores in 2006.
Asda, Tesco dominate
You have to have the right type of stores to be a success in non-food, Edward Garner, Communications Director of market information organisation TNS Superpanel. "There are really two big players: Asda and Tesco," he told just-food. "Sainsbury has had a stab at it but its estate doesn't really support it. They have a lot of 20 to 25,000 square-foot stores."
The advantage for Asda was that non-food brought in higher margins. "They take the view that they have a lot of traffic from groceries and they can trade in non-food on the back of it," he said. "Historically Asda has had a lot of large stores, so they were well placed to do it."
However, Tesco's success in the non-food area had been part of its attack on Asda. "There used to be two fundamental reasons to go to Asda: price, with the lowest prices always, and choice with the claim of an unmatchable mix," he said. Over the last year or two we've seen the expansion of Tesco in this area.
"What has happened is that Tesco has got more competitive on price, so it's been able to nibble at one of Asda's unique propositions. And they have a large non-food offer as well," he said. "That's why Asda has gone flatline and Tesco is growing. They've shot both Asda's foxes; price and selection."
Competing on non-food might be seen as easier than trying to cut tiny amounts off tight food margins. "They would view the high street as fairly soft competitors," he said. "It's ripe for attack, rather than bashing each other over the head on groceries." And the trend to supermarkets selling non-food items like clothing was mirrored by a trend in the high street to better value, with, for example, food company ABF's clothes retail offshoot Primark doing well, while the more traditional Marks and Spencer chain struggles.
Asda had found that non-food was good for food sales. ""If they expand the space given to non-food and reduce the space available for food sales of food have gone up," he said. "The non-food is driving traffic to stores."
The key point was that non-food gave the supermarkets a chance to grow, just like expanding outside the UK. "Non-food is an expansion area," he said. "Grocery is flat."
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