Comment: Well-regarded Waitrose still needs to adapt
By Dean Best | 9 March 2012
Online and convenience will be two areas on which Waitrose will have to focus
Waitrose, the upmarket UK retailer, has proved one of the success stories of the downturn and, despite a fall in profits in 2011, industry watchers remain upbeat about its performance, strategy and prospects. But, Dean Best writes, there are areas in which Waitrose still needs to improve.
There is no denying that UK retailer Waitrose has had a much better downturn than many industry pundits forecast.
After seeing profits fall in 2008, the upmarket grocer has, in recent years, managed to increase its market share by maintaining its well-heeled image and, at the same time, developing a reputation, in some areas, for value.
Waitrose's operating profit increased in 2009 and 2010 as its broader appeal and new stores boosted sales. However, with food sales volumes falling in the UK last year, competition in the country's grocery sector intensified, weighing on Waitrose's profits. This week, the retailer reported a fall in operating profit in 2011 due to investment in expansion and in running promotions to compete with the likes of Tesco and Sainsbury's. The fall in earnings, however, did not concern industry watchers, who backed Waitrose's strategy.
Conlumino managing director Neil Saunders said Waitrose had "delivered a sterling overall performance" and pointed to its increased market share.
"In large part, such growth has been possible through an investment in sharper prices. Naturally, this has put margins under pressure and has resulted in a lower operating profit. However, in our view such a defensive move is sensible and without it Waitrose would probably have lost, rather than gained, market share," Saunders.
"Price is only one side of the equation, however, and Waitrose has continued to invest in store refurbishments, innovative new products and customer service. All of these things have ensured that more prominent value messages have not been to the detriment of Waitrose's heritage in quality. Indeed, Waitrose's ability to straddle the price-quality equation has been highly impressive."
Speaking to just-food after Waitrose's results were announced, managing director Mark Price said the retailer "hoped and expected" profits to grow again in 2012 but said it was focusing more on serving its customers. "Our hope would be that we would see profits grow in the year ahead. We are only five weeks into 52-week year. A lot can happen in the market. What we're really focused is what the potential is for the Waitrose brand, for our partners and for our customers. That is the main thing we concentrate on, making sure more customers can access Waitrose, that the customers do access Waitrose get better value every year," he said.
Waitrose would be wise to continue to invest in price. Tesco's recent woes in the UK have led its chief executive, Philip Clarke, to enact a series of iniatives to revitalise sales and competition will remain intense. Price indicated that Waitrose will increase its promotional activity. "We are confident that we will be able to do is match the market in terms of its price moves and we've secured additional funds on top of that to invest beyond the market. What you'll see this year is Waitrose become more price competitive," he said.
The Waitrose chief, however, insisted the retailer will also stick to its upmarket credentials. "We're giving our customers more - the opportunity to buy great value in terms of everyday but also the most fantastic top tier. We think that's a recipe for success," he added.
Verdict Research senior retail analyst Cliona Lynch says Waitrose's premium lines have also been a factor in its performance in the downturn, not just prices. "The economic downturn has seen customers not just trading down in food and grocery to value ranges and discounters, but also trading up," she says. "This occurs in moving from eating out to dining in and entertaining at home. Waitrose allows customers to have affordable indulgence in a time where discretionary spending is under pressure. Ongoing innovation in food ranges and strong brand ambassadors in [celebrity chefs] Heston [Blumenthal] and Delia [Smith] cement the position of the retailer as high-end and makes customers feel their money is well spent."
However, there is still room for improvement, not least online. Price insists there is "great potential" for Waitrose online and cited recent sales growth of 30%. However, online is one of the key battlegrounds in UK grocery. Analysts have estimated that online food sales will almost double from their 2011 level by 2016 and many of the major multiples are investing in the channel, not least Tesco, which accounts for a whopping 48% of online sales.
"With just one dark store in operation the channel is largely store reliant which may need to change as volumes of orders increase. A more centralised dark store distribution system would be a sensible move for the retailer in 2012 to support ongoing online growth," Lynch said.
Online can be a convenient way to shop but the convenience channel in its more traditional sense - smaller stores within easy reach - needs to be another area of focus for Waitrose. The company is continuing to build its network of c-stores and it needs to, with Tesco and Sainsbury's continuing to add stores, Asda possessing a raft of smaller outlets after the acquisition of Netto's UK business and Morrisons pledging this week to open more of its M Local shops.
"The ongoing growth of the convenience estate will be particularly important as Morrisons M Local convenience concept is rolled out throughout the year," Lynch says. "Adapting the Waitrose offer to smaller store formats will need to be under ongoing review as innovations in food-to-go and service counters continue in the sector."
Waitrose has, by many measures, had a good downturn. Focusing on price and premium has allowed it to attract new shoppers and hold on to its traditionally more affluent customer base. The retailer says it will look at developing its businesses in the online and convenience channel and Lynch argues more needs to be done.
"Adding convenience and online to the business is not only the right step, it is a necessary one to keep up with a changing consumer and improving competitors. Waitrose will need to continue to roll out convenience stores and expand the strength of its online offer to keep on course in 2012."
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