In part two of our management briefing, Sam Webb talks to experts about the possible changes to the landscape of the food retail sector in 2012, amid power shifts, market volatility, evolving shopping trends and changing consumer habits.
There was no doubt that 2011 was an eventful year for the grocery retail sector. Shopper confidence was hit by continued economic turmoil, high raw material prices forced retailers to pass on costs and more shoppers turned to the convenience sector or engaged in online shopping, to some retailers’ cost.
Few, if any, retailers typify these concerns like Carrefour, which issued numerous profit warnings in 2011 and battled management upheaval, shareholder mutiny and disappointment in its plan to revamp the hypermarket format in France.
Simon Chinn, lead consultant at Conlumino, says a lot of Carrefour’s problems stem from its slow adoption of the ‘click and drive’ concept, where it has lost ground to rivals like Auchan and E.Leclerc.
He said: “The click-and-drive concept is the online grocery model that’s working best for retailers in France, Germany, Spain and Italy. I think this will be a key focus for many of the larger retailers. Carrefour has lagged massively. It has 30 collection points whereas it has 300 hypermarket stores in France. It’s shockingly low.”
Carrefour will kick of 2012 with a new CEO with this week’s announcement that Georges Plassat, a former executive at the retailer, will return to the business in June.
Chinn says Plassat is “a good retailer” but faces a range of issues at Carrefour, including the need to reinvigorate its online business. “The other thing there is still a question over is the large hypermarket format. That’s been a persistent problem and, while the Planet concept was a great idea to reinvent it, it hasn’t worked,” he says. “The new CEO is going to have to come up with a way to deal with this. It doesn’t work in the tough economic climate and the cost of converting these stores and the costs of maintaining them is excessive.”
As well as leading retailers to review its store formats, the rising popularity of online shopping has also spawned a “savvy” generation of consumers, according to Chinn. These shoppers – be they online or in-store – exhibit little loyalty and cannot be passively pitched to in terms of discounting and price comparison marketing communications. The rise of what Morrisons CEO Dalton Philips last year called “professional shoppers” grew last year as consumers battled rising food prices and this will continue in 2012.
“Although inflation has subsided slightly on a household basis, they’re still under pressure and are running tight budgets,” Chinn says. “More people are using smartphones with apps which do on the spot comparisons to see where they can get the cheapest butter or milk. It’s no longer in the retailer’s hands, they have to be more willing to provide what the customers want.”
The economic stagnation seen in many Western markets last year is likely to continue in 2012; in fact, some industry watchers believe economic conditions could worsen this year. Combine that, with low consumer confidence and the phenomenon of the “professional shopper” and it is likely competition will intensify in the coming months.
Clive Black from Shore Capital says the consumer backdrop is going to remain “challenging” but he predicts it will not deteriorate at the same rate as the last three years. There could, he argues, be some stabilisation in consumer perception trends – a “light at the end of the tunnel”.
However, Black did sound one note of caution over the looming threat of the debt crisis in the Eurozone. “If the euro disintegrates in a disorderly way, everything I’ve just said is nonsense. The economy will go into a deep recession and unemployment will rise.”
Across the Atlantic, analysts have forecast that there will be further consolidation in the US retail market. In December, Bi-Lo acquired local peer Winn-Dixie to create a new entity with nearly 700 stores.
Will there be more deals? Most likely, says analyst David Livingston, of DJL Research. “Safeway Inc has a few more failing divisions in Texas and Chicago. Delhaize is going nowhere with Sweetbay in Florida. I expect Bi-Lo to close severely under-performing Winn Dixie stores and sell off stores to competitors as well,” he says.
Tesco, the world’s fourth-largest retailer, is a regional retailer in the US, where it operates the Fresh & Easy chain on the West Coast. Fresh & Easy is yet to make a profit and industry watchers will be looking to see if Tesco manages to cut the venture’s losses again this year. However, it is in its core UK market that Tesco faces the most pressing set of problems. This week, figures from Kantar Worldpanel revealed that Tesco’s market share in the UK had fallen below 30% for the first time in seven years.
Away from the major global retailers, one mid-size business that will continue its quiet expansion this year is Portugal’s Jeronimo Martins. The retailer has successfully built a business in Poland, becoming the country’s biggest retailer through cautious, measured acquistions, and now it has its eyes on Colombia.
Chinn is quietly impressed, but warns the retailer must not lose focus on their operations in Portugal. “Jeronimo Martins operates a slick business, especially in Poland with Biedronka. They haven’t expanded rapidly in eastern Europe but they have been quite savvy. If they had expanded rapidly a few years ago they would be suffering now. That caution has paid off for them.
“Where it is likely to suffer is the home market. They shouldn’t run the risk of what is affecting the big players and neglecting the Portuguese market. The country is suffering massively and there is a risk of another credit downgrade and retail sales will decline.”
Retailers will be hoping for steadier waters in 2012, allowing them to get back on course and apply urgent repairs to struggling regions and formats. If the black clouds overhead the global economy will clear remains to be seen.