02 March 2020

Reasons to be positive for the UK Grocery Market in 2020

What we see at the start of 2020, following three and a half years of struggle, is an accepted cautious optimism in the UK retail market, of a likely growth of at least +1.0%, despite weaker food sales, according to the latest predictions from the KPMG/Ipsos Retail Think Tank.

Non-food retailers that have adapted well over the tougher years should now feel the benefits of what is perceived as a real turning point for the retail sector. Successful retailers will be the ones focusing on communicating their key values and USP as part of their growth strategy.

Slow food sales over the 2019 Christmas period are painting the picture of a challenging 2020 for supermarkets, whilst smaller independent retailers have shown better resilience from closures in 2019. Indeed, closures, administrations and re-structures for inefficient and irrelevant retailers will continue in 2020, with the number predicted to increase from 2019.

 

A new political landscape

The recent political events in the UK led to a new perceived certainty, likely to translate in increased consumer confidence and re-ignite spending.

After 36 months of political instability, the last General Election result brings an impression of clarity on Brexit. It is believed this will be welcomed with open arms by many UK shoppers, at least in the short-term, even by those who predict Brexit will be damaging to the UK economy in the longer-term. 

Obstacles still lay ahead around tariffs and trade deals for retailers to negotiate, however the idea of ‘getting Brexit done’ is expected to finally release the positive effects of rising wages, low interest rates and increased employment levels. This follows the period of uncertainty over the past few years that has caused consumers to think more carefully about parting with their cash.

Retail overview

Many retailers will be looking into reviewing their supply chains to avoid or mitigate disruption from new tariffs and trade deals, paired with a growing need and awareness to reduce emissions. This is expected to present a post-Brexit UK with an opportunity to focus on local manufacturing, sourcing and food production, bringing the importance of provenance into focus.

Parting from the familiar narrative of the food sector outperforming others, it is anticipated that 2020 should see non-food make a comeback, and this return to sales

 KPMG/IPSOS RETAIL THINK TANK, ‘Outlook for 2020’

growth will offer retailers the opportunity to readjust and transition into new, more efficient models.

So where does that leave the grocery sector?

Grocery in 2020

Structural changes will be increasingly necessary in this sector too and a few factors have been shaping this side of the retail landscape. 

Discounters will continue to be an essential part of the future of this sector and are on target to reach a combined 17% market share in 2020.During the last 12 weeks of 2019, Lidl led the way with sales growth of 10.3% amongst the brick & mortar retailers. Together with Aldi, the discount retailers took their highest ever combined Christmas market share.

There is a shift in consumers behavior, moving away from ‘mission’ shopping such as completing weekly and top-up trips, towards on demand, ‘occasion shopping’. 

Fast food operators, such as Uber Eats and Deliveroo, are also growing in popularity in response to an increasing demand for home deliveries. 

Responding to this trend for shoppers looking at curated fresh meals, supermarkets will continue to expand store space for fresh and chilled goods.

Co-op’s 3.0% growth was ahead of the market, and enough to increase its share by 0.2 percentage points to 6.1%. Much of its success was down to chilled products, with fresh poultry sales up by 10% and convenience items like pizza up 9%.

Mike Watkins, Head of Retailer and Business Insight at Nielsen UK, points out: “Shopper behaviour is changing with more of what we consume being purchased away from large supermarkets and instead at small stores, out of home or using food delivery specialists and platform providers. There will be consolidation in this channel and possibly investment by other retailers as different business models emerge. And after three years of weak growth there is a need for many supermarkets to reposition in order to be able to achieve a growth in value sales that at least moves in line with CPI, and a recovery from the 1% decline in volumes across the £164bn food retail industry in 2019 (Nielsen Growth Reporter).

The positive stories

Sainsbury’s 

Considering the failed ASDA merger, Christmas can be seen as success for the second biggest Grocery outlet in the UK. 

Whilst Sainsbury’s posted 0.7% decline in like-for-likes in the latest Kantar update, this must be broken down in the 0.4% increase in grocery, a 4.4% increase in Tu clothing and a 3.9% decrease in general merch (Argos), confirming the view that the Argos purchase was more about its capability than their revenue potential.  

Another key point to note, was an actual increase in online shopping of approximately +5%.  Whilst this is still a small share of the total business, it points towards a need from other players in the market to focus on ecommerce to drive growth. 

Greggs

Whilst its annual report is not out yet, based on four positive forecast updates and the announcement it will be paying a dividend of £7M in staff bonuses for 2019 performance, we know it was an extremely positive year for this retailer.

Its objective is straightforward: to be present in 2,000 outlets in the UK within the next year and it is on track to hit this target thanks to the strategy to build its fulfilment capabilities first, which ensured smooth and effective expansion.

4 KANTAR ‘Sober Christmas gives retailers a headache’, 07.01.2020

5 Sainsbury’s Investor Relations, ‘Third Quarter Trading Statement for the 15 weeks to 4th January 2020’

6 Sainsbury’s Investor Relations, ‘Third Quarter Trading Statement for the 15 weeks to 4th January 2020’

Too often, in the modern retailing landscape, this basic requirement is overlooked in favour of a quick expansion, which is often unsuccessful due to lack of appropriate infrastructures and fulfilment. As a note to other retailers, solid fulfilment infrastructure should be the base for any growth strategy.

Ocado

All supermarket chains, including discounters, were outshone by the online pureplay Ocado, which increased sales by 12.5%, taking its market share to 1.3%. It has been the fastest grower since June 2019.

Its success story further points to eCommerce as a key driver of growth for grocery. The smart platform development, innovative technology and distribution system adopted by Ocado are key to respond to the modern consumer’s demand and drive growth.

Chiara Lucchini, eCommerce Manager, OMG UK

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