Retailers must work to keep supermarkets relevant

Retailers must work to keep supermarkets relevant

It was not a good Christmas for UK retailers this year. But, as we gear up for next week's round of results form the largest UK supermarket operators, Katy Askew believes it is clear the sector is also grappling with some more meaty issues. 

With real incomes under pressure, higher utility bills resulting in inflation and a concerted effort being made to paydown debt, hard pressed consumers apparently kept a tight lid on spending over the festive season. 

The constrained consumer environment meant consumers either cut back entirely or shopped around for the best deals possible. And, with little worse for food retailers than being left with excess stock, discounting was abound - with obvious implications for profit margins. 

The evidence of difficult trading conditions was in full force in the British Retail Consortium's statement on the key Christmas trading period. According to the industry body, sales are likely to be slightly up - but only in line with shop price inflation. 

"Sales were hard-fought and often driven by discounts so cutting into margins, though retailers worked hard to ensure they had the right products available, whether in store or online, and at the right prices," DRC director general Helen Dickinson commented. 

"Sales have not collapsed but the pressure is coming from adapting to conditions that consistently deliver minimal year-on-year sales growth. There is only so much cost cutting and new efficiency retailers can achieve," she added. 

In this context, next week's quarterly results updates from three of the country's largest retailers - Tesco, Sainsbury's and Morrisons - are unlikely to make for cheerful reading. Indeed, Investec analyst Dave McCarthy warned today (3 Januray) that "Christmas started slowly and never got going" and added that this is likely to result in downgrades to consensus profit estimates. 

However, the UK retail sector has more to worry about than downbeat shoppers. There are some significant structural issues the industry must also tackle before fortunes are revived. 

The BRC highlighted that retailers have worked hard to develop online and click-and-collect services. 

"Online sales growth accelerated as we took advantage of the investment that many retailers have made in giving us the flexibility we now demand around delivery options like click-and-collect and security," Dickinson emphasised. 

Likewise, UK retailers have been working hard to develop their convenience channels. 

This comes in response to falling sales at larger stores and a massive growth in demand for convenience shopping - be it in smaller c-stores or from the comfort of your armchair. However, as these routes to market come to prevalence they are not generating incremental sales growth - but rather risk cannibalising sales from retailer's core portfolios. 

As McCarthy observed: "Tesco and Sainsbury are likely to report strong internet and convenience growth, but the more these grow, the more sales from large stores fall."

It is vital for UK retailers to invest in their online and convenience capabilities in order to remain competitive and meet growing consumer demand. But, in doing so, they are increasing capacity in an already highly-competitive and well served sector.  

Perhaps, then, it would also be wise to increase investment in activities that woo consumers back to more traditional stores. UK supermarkets have staked much of this battle on the use of vouchers - a marketing tool that is becoming ever more prevalent. A growing focus on improving the shopping experience and delivering quality fresh products has also been a noteable trend in UK food retail.

However, UK retailers must think outside the box and come up with reasons why consumers should want to shop in supermarkets if they are to avoid the same fate as the ever less-relevant hypermarket sector in France.