FTSE 350: Supermarkets face rethink of non-food offerings

More or less across the board, supermarkets have been reporting solid demand for grocery, but weakness in general merchandising. Sainsbury’s like-for-like growth in grocery and clothing was more than offset by a drop-off in general merchandise. Tesco did not break out figures to illustrate its trading across the different product categories, but noted that “reduced general merchandising sales” had impacted overall trading. It is working on refining its offer. Marks and Spencer (MKS) has traditionally been regarded as a general retailer, but saw its trading behave in a similar way to the supermarkets, with growth in food while its clothing and home division fell.

Analysts say this weakness in non-food signals a shift away from disposable, impersonal and low-quality products towards spending on higher quality items – notably Marks and Spencer has seen sales of cashmere items pick up – or experiences. One swallow doesn’t make a summer (or winter), but should this trend carry on into 2020 it could force the supermarkets to fundamentally rethink their offerings in non-food. 

Indeed, even in food Greggs’ (GRG) success with vegan products has demonstrated the value of keeping up with changing consumer trends. Tesco, Sainsbury and Morrisons have all highlighted the success of their plant-based offerings in recent updates.

As footfall continues to fall, the growth in online grocery looks set to continue unabated. All of the groups have some form of online offering in place, but Ocado (OCDO) is best placed to reap the benefits. The group is in the process of shifting away from online grocery delivery towards offering third-party e-commerce services. It retains some direct exposure to the food retail market through its Ocado Retail joint venture with Marks and Spencer, but the real test of the group’s new direction – and its pricey shares – will be its ability to sign up partners for its solutions platform internationally. 

Morrisons also stands to benefit as more of the weekly shop moves online. The group deepened its ties to online retail monolith Amazon (US:AMZN) in 2019, rolling out the 'Morrisons at Amazon' offering to new UK cities. Management has described its work with Amazon as “a significant, capital-light growth opportunity”, and would doubtless welcome the opportunity to expand the partnership. Plus continued involvement helps feed the rumours of an eventual takeover offer.

The group is planning to open its first ‘mini’ fulfilment centre in late 2020 or early 2021. The smaller centres are intended for less densely populated areas where full-sized centres would be unsustainable. The performance of this first centre will be a crucial indicator of the group’s ability to expand its offering outside of urban centres.

Sainsbury spent much of last year trying to get past its nixed merger with Asda, and while it has been making good progress on its ambitious store improvement programme, we expect investors will baulk at any indications that the group’s new direction – expanding its convenience store footprint and bringing Argos into its supermarket stores – is failing to gain traction. It is already too late for chief executive Mike Coupe, however, who quit last week.