As far as household spending goes, few things could be more central to a family or individual's outgoings than the cost of the weekly shop. Data from the Office for National Statistics showed spending on food and non-alcoholic drinks accounted for close to 11 per cent of all spending in the year to March 2018. The cost of a supermarket shop is keenly felt by most people – hence the default question to politicians at election time over the price of a pint of milk, a way of supposedly gauging how in touch they are with the man on the street.
Supermarkets appreciate the importance of competitive price points, and for a long time sought to use it to draw in the customer. J Sainsbury (SBRY) went with the slogan 'Good food costs less at Sainsbury's' for decades, while Asda sought to imprint 'Asda price' in shoppers' heads in repeated marketing campaigns. Indeed, as Sainsbury and Asda pitched their proposed merger earlier this year, the ability to lower prices was a key focus. Management committed to investing £1bn in lower prices annually three years post-merger, reducing the cost of everyday items by a tenth.
Now, with the proposed tie-up firmly rejected by the Competition and Markets Authority (CMA), the groups are forced to find a different way to stave off discounters such as Aldi and Lidl, which have nipped at their heels in recent years. In the wake of the CMA's announcement, Asda chief executive Roger Burnley advocated a focus on efficiency, quality and service, saying "ease is almost as important as price". Sainsbury's opted for a refresh of its previous strategy, first introduced in 2014, adding investments in its store portfolio and digital capabilities. Will these initiatives be enough to mitigate the price dynamic, or will the supermarkets continue to see discounters and online offerings chip away at market share?
Disruptive discounters
The traditional supermarkets have also struggled with both the rise of discount supermarkets and the rise of e-commerce in grocery shopping – embodied in the form of Ocado (OCDO). Consumer spending decisions are informed by a range of factors, such as convenience, selection and price – and in recent years the upstarts have been able to find the right combination to steal market share from the 'big four' – Tesco (TSCO), Sainsbury, Asda and Morrison (MRW). Data from consumer research group Kantar WorldPanel shows that since the beginning of 2017 each of the big four lost considerable market share, while Aldi, Lidl and Ocado all saw their shares grow.
However, there is some indication that the focus on low prices may be on the wane. Research from GlobalData into consumer future sentiment – an average of confidence on the economic outlook, personal finances and future retail spending prospects – shows a sharp improvement in consumer confidence between March and May this year. Thomas Brereton, an analyst at GlobalData, said low consumer confidence and shrinking real incomes have made price increasingly crucial in recent years, although other factors are increasingly at play. "[The] discounters have really surfed that wave," he said. "People traded down to save money. They're now going back to places with better store standards and greater range."
Banking on branding
Branding is also a powerful weapon in supermarkets' arsenals. Mr Brereton said shoppers show higher loyalty to specific brands, rather than to the retailers that sell them. Supermarkets have been working to establish brands to take advantage of this. Kantar Worldpanel's latest market update indicated Tesco was having success, with its Exclusively at Tesco range showing up in a quarter of customers' baskets. Similarly, Waitrose has managed to capitalise on the trend towards healthy eating with its Good Health range, one of the fastest-growing own-label lines in the UK with sales of £13.4m. Mr Brereton also pointed to Sainsbury's recent adverting campaign focusing on its 150th year in business as another example of attempts to build a brand connection.
A strong brand can be a competitive advantage, but it is far from unassailable. One would struggle to find a better established brand in the UK food industry than Jamie Oliver. However, following the collapse of his Jamie's Italian restaurant chain, JD Wetherspoon (JDW) chairman Tim Martin told Sky News the chain had been seduced by "the drug of branding", and forgot to work hard enough on the underlying business.
These efforts also haven't slowed Aldi and Lidl down – Kantar Worldpanel's latest data shows that they have continued to gain market share, drawing an additional 1m and 630,000 customers, respectively, through 2019.
As other supermarkets work to improve their service, they have the unenviable task of balancing their capabilities with customer expectations, and evidence indicates customers hold discounters to a lower standard than many of their market peers. Earlier this year, consumer review group Which published its supermarket survey. On in-store terms, the four top performers were Waitrose and Marks and Spencer (MKS) – both firmly at the premium end of the market – followed by Aldi and Lidl, who are at the opposite end. The discounters had overall customer satisfaction scores above those of Wm Morrison, Sainsbury and Tesco, despite receiving the lowest possible ratings for store appearance, staff availability and range of products. Clearly, the mid-market retailers face a stricter task satisfying customers.
However, there is evidence of retailers successfully jumping from a sector in decline into a more fertile one. Greggs (GRG), for example, has since 2013 been making the transition from a bakery group – a retail category that has been losing ground according to data from the Local Data Company – into a food-on-the-go specialist focused on convenience; a category that has seen strong growth.
The push for convenience
The discounters' response has been to make their own convenience plays, expanding their store footprints rapidly while releasing own-brand products. It appears to be working. Both Aldi and Lidl reported record trading over the Christmas period.
One area where the mid-market supermarkets appear to be leaving the discounters behind is in online delivery – itself a play on convenience. However, even here, they are being outcompeted by Ocado. The online grocer topped Which's survey for customer satisfaction. Recent research from real estate services group Colliers International warned that while the proportion of grocery shopping done online continues to grow – it was up 3.9 per cent in 2018 – this is due to existing customers spending more, while new customers are hard to attract. Indeed, the online grocer has seen its market share grow only 300 basis points to 1.3 per cent since the beginning of 2017, according to Kantar Worldpanel.
However, while online currently accounts for a relatively small part of the overall market, the entrance of a retail giant such as Amazon (US:AMZN) could prove disruptive. Rumours were circling at the end of last year that the US tech titan was looking at Wm Morrison as a potential takeover target. Wm Morrison already has a wholesale supply deal with Amazon, and rumours surfaced that it could be a future acquisition following the latter's deal to buy Whole Foods in August 2017.
