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March 6, 2014

Comment: Growth of online channel good news for big brands

Online sales in the UK are on the rise as consumers increasingly shop for their groceries over the internet. Online sales represent a key growth area the country's largest retailers are vying to exploit. In the UK - the birthplace of private label - online expansion is good news for the manufacturers of leading food brands, Katy Askew suggests.

Online sales in the UK are on the rise as consumers increasingly shop for their groceries over the internet. Online sales represent a key growth area the country’s largest retailers are vying to exploit. In the UK – the birthplace of private label – online expansion is good news for the manufacturers of leading food brands, Katy Askew suggests.

In a flat overall grocery market, the country’s largest retailers are increasingly leveraging online capabilities to drive growth.

According to IGD, a research firm, UK online grocery sales totalled GBP6.5bn in 2013. Online grocery sales are expected to more than double in value, rising 124%, to nearly GBP15bn by 2018, IGD forecasts.

This growth trajectory compares favourably with the overall grocery market in the country. IGD says total UK grocery sales stood at GBP169.7bn in 2013, an increase of 3.7% on 2012. The research provider expects total revenues to increase by 21.3% to GBP205.9bn by 2018.

For the country’s largest retailers – Tesco, Sainsbury’s, Asda and Morrisons – expanding online capabilities has become a key priority.

Tesco is the country’s largest online retailer, having established its online delivery business in 1996 the group now generates online food sales of GBP2.5bn annually in the country. But the rest of the pack are growing apace.

In its most recent quarterly update, Sainsbury’s emphasised that online sales grew well ahead of group sales, rising by 10% year-on-year. Asda, the UK arm of Wal-Mart, recently detailed plans to increase investment online, with a target of 1,000 click-and-collect points in the next five years. Meanwhile Morrisons, the multichannel laggard, began delivering groceries ordered online in January. While the group is playing catch-up, Morrisons is confident that it can expand quickly through its tie-up with online grocer Ocado.

The revenue potential offered by online retailing is clear. Time-pressed consumers are increasingly moving their bulk weekly shop online. Convenience is the key to the appeal of online grocery shopping. For many consumers, shopping online is also a money saver because it requires a more targeted, organised shop.

As research firm Daramonitor observes: “Convenience is a major motivator of consumers’ interest in the online channel for sourcing groceries. It requires less physical effort and a more organised shop compared to the in-store experience.”

In its report, The Future of Online Grocery Shopping, Datamonitor adds the development of new technologies and services can only quicken the expansion of online grocery retailing.

“Ever-improving web technology constantly increases the speed and ease of internet shopping. The growing prevalence of consumers purchasing goods and services on the internet continues to show great potential, enticing manufacturers and retailers to plunge into the virtual world….This can only be strengthened further by rapidly advancing mobile accessibility.”

The potential is evident and the UK’s largest retailers are left battling it out to grow online volumes – and improve online profit margins. But where does this leave food manufacturers?

A more “organised” shop is far from welcome news for sales of impulse products. Consumers will be less tempted by that cheeky chocolate bar at the checkout. But arguably, the convenience space is of more significance for impulse – eat now – snacks anyway.

As a spokesperson for convenience retailer The Co-operative Group told just-food, convenience is the other bright spot for UK grocery retail growth. Consumers who shop online often look to town centre convenience stores for top-up shopping, the spokesperson suggested.

For large branded food manufacturers, however, the rise of online shopping trends is apparently good news.

According to Premier Foods chief executive, Gavin Darby, the company’s branded sales are tracking ahead of the market. And, significantly, the group’s brands perform better online than in-store. “Brands do well online,” he observed during a presentation for analysts earlier this week.

Why would brands perform better online?

Premier is one of the largest UK branded manufacturers with a stable of strong ambient brands including Bisto, Oxo, Ambrosia and Mr Kipling. In the categories in which it operates many of Premier’s brands are synonymous with the product itself.

A more “organised” shop, as Datamonitor terms it, means that consumers are less distracted by the competition presented by private label and challenger brands. In many cases, they already know what products and which brands they are searching for.

When consumers shop online, the majority of products will be found through the retailer’s search engine. So, when a customer wants to buy gravy mix they may simply search “Bisto”. In this instance, they would not be exposed to the rest of the shelf where other alternatives are presented.

A quick expedition into the virtual stores of some of the country’s largest retailers confirms that if a consumer uses a more generic search term “gravy” Bisto is still reliably one of the top products returned by the search. The same is true for other brands that have become bywords for products – Heinz ketchup, Coca-Cola cola, and even Kingsmill and Hovis bread brands.

While this increased focus might be a welcome trend for big brands, it is a fresh obstacle for new entrants or challenger brands. For these manufacturers, in an increasingly digitalised world the rise in online grocery retailing makes it harder to catch attention through a product’s on-shelf appearance. Often, these brands have a premium leaning – and the quality message conveyed through packaging and display is lost.

Alternative ways must be found to reach consumers and – frequently among the success stories – digital is the answer here too.

Social media – Facebook and Twitter – has been used to great effect by challenger brands such as Ella’s Kitchen and Plum Organic (before their respective acquisitions by Hain Celestial and Campbell Soup Company) in the baby food sector.

In the digitalised era, consumer advocacy has gained a hitherto unparalleled power. While big brands may perform best through online retail channels, tapping into the power of consumer engagement and eliciting a strong emotional response is still often best achieved by challenger brands.

“The future of FMCG is being written now but it’s not being written by us,” United Biscuits’ category controller Marc Warburton told a recent IGD conference examining the online opportunity.

Creating engaging social media content is “not about ROI” and brands should be wary of being “blinded by monetisation”, he argued.

Brands need to be bold to harness the growth of the online channel.

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