Verdict Forecasts Food & Groceries 2004 says that UK food retailing in the new millennium will see lower prices, lower margins, some major casualties and a spate of mergers and acquisitions. The study says that many of the trends which are changing the retail landscape of the grocery trade were established well before Wal-Mart acquired Asda. It points to the steady margin reduction across the leading players over the past five years. Verdict’s analysis also shows that grocery sector price inflation has been consistently lower over the past three years.
A further key indicator concerns growth of sector sales per foot which has all but evaporated. The market’s rapidly approaching saturation is the result of dramatic growth in physical expansion. The past ten years have seen a 25% explosion of capacity, equivalent to a staggering 20.7 million square feet of additional grocery space, according to Verdict.
All this extra space has been used to drive the trade’s rapid growth, not just in capturing increasing food sales from once numerous specialist sectors like butchers and greengrocers, but in an expanding array of non-food markets too, from healthcare and clothing, to stationery and newspapers. Going forward, the picture is different. The opportunities to open new stores are far fewer with much tighter government planning regulations. Verdict forecasts annual growth of less than 1.5%, while sales per square foot in real terms will barely show any growth at all over the next five years.
This severe brake on physical expansion has made retailers focus more than ever before on their existing stores. Competition between the major players has intensified. Such an environment has made it much more difficult to raise prices than ever before. Significant further downward pressure is now coming from the current Competition Commission inquiry and the government’s apparently negative views of food retailers. The media’s articulation of these views is fuelling the long-running rip-off Britain campaign.
While the report says that its research demonstrates that the sector has been intensely competitive for years and will become more so, it acknowledges that all this negative publicity will of itself act to keep inflation down.
Beyond all this is Wal-Mart, the most public entrant into the UK retail market there has ever been. Verdict says that its impact will be profound. The report’s view of the next five years is characterised by a market in which Wal-Mart, though not the largest player, sets the competitive agenda.
Wal-Mart is a volume-driven retailer which manages to leverage its scale advantages better than any retailer around the globe. It enjoys unparalleled buying power among the leading global brands and is able to negotiate better buying terms than any competitor. Its use of systems and logistics to manage its stocks is far advanced of UK retailers and Wal-Mart is highly skilled at translating these advantages into lower prices for customers. These lower prices help it to maximise sales volumes which in turn help to sustain a virtuous circle of sales growth.
Verdict says that Wal-Mart has yet to exert very much direct impact on Asda, but it expects a much more aggressive pricing stance to emerge as next year unfolds. The company will also try to increase the ratio of net to gross sales space at each branch, which will significantly boost market share.
The result of all this will be to increase pressure on every player in the market. However, by far the most pressure will be felt by Tesco, Sainsbury’s and Safeway. These three companies are its most direct competitors and the four majors share a significant number of their customers. Verdict says these shared customers or “floating shoppers” represent the heart of the battleground in UK grocery going forward. The major players will be addressing these promiscuous shoppers through loyalty cards and heavily advertised price promotions.
For years, UK food retailers have enjoyed profit margins which were the envy of the world but the report say those days are gone forever. It forecasts growing downward pressure on margins, a result of grocery sector price inflation under 1% for each of the next five years. A switch in focus from superstores to smaller city centre and neighbourhood stores will allow space growth to range between 1.0% and 1.5%, but nevertheless, new stores can no longer be relied upon to generate growth.
Once inflation and space are stripped out, like-for-like sales volumes are forecast to rise at just under 1.0% per year, less than half the rate achieved over the past five years.
The report’s space forecasts are made in the belief that the government will not relax its planning guidelines. Verdict says that this will prevent Wal-Mart from introducing its most successful format here in the UK – the 200,000 square feet plus supercentre. It will also be difficult to open much smaller stores. However, the report says that introducing its superior logistics would allow the company to convert significant existing storage space to selling area. This could add some 20% to Asda’s current market share, pushing it much closer to Sainsbury’s in second place. Much more aggressive pricing will boost this shorter term market share growth still further.
The promotional activity and pricing initiatives being seen right now and sighting shots. The real battle has yet to begin.
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