A graduate of both the business and law schools at the University of California, Berkeley, Jeff Jackson has held leadership positions at Fresh Express, the Castellini Group of Companies and Chiquita. For the last seven years he was CEO of the Moraitis Group in Australia. In this opinion post Jeff discusses the next steps for UK retailers
The major UK retailers apparently emerged from the Global Financial Crisis (GFC) with all the correct strategies.
Data insight – tick. Ready chilled meals – tick. Direct sourcing, experiential store formats, online sales, private brands, capture more spend – tick, tick, tick, tick, tick.
What they may not – and perhaps could not – have forecast was that these strategies would be inadequate to maintain growth and consumer loyalty in the face of emerging trends.
Trends materialising at a turbo pace, and coming at them from at least three directions.
The first trend is consumer polarisation. The discounter is winning the middle class war. Consumers of all demographics are now both looking for low costs on basic items and willing to spend up on luxury.
The discounters have enjoyed double-digit growth since the GFC. The UK discount grocery market is currently worth £10 billion in sales per annum which is forecast to double to £20 billion in the next five years, according to the Institute for Grocery Distribution (IGD).
Essentially, the retail format can no longer be viewed singularly with a range of products that is trying to attract a wide demographic. Rather, the retail format now should be viewed as two or even three distinct formats: the discounter, the ‘experiential’ (hot food, bakery, etc.) and the small format.
As Sainsbury’s figured out, sitting in no man’s land between experiential retailing and discounting would lead to continued decline. Forging a joint venture in late 2014 with Netto for a return to the UK, Sainsbury’s has split its retail formats and positioned itself for growth. In 2010, Netto sold its existing 197 stores. Asda bought and rebranded 146 with the intention of converting the smaller formats to “experiential”, not discount. Morrisons bought and rebranded 16. Neither Asda nor Morrisons successfully repositioned towards the discount target held solidly by Aldi and Lidl.
Meanwhile, Marks and Spencer and Waitrose are focused on the experiential and continue to grow.
The second trend is that the internet and online shopping is rapidly changing consumer purchasing patterns. The convenience economy is now on-demand and open 24/7.
Online shopping is growing rapidly. According to IBISWorld, online grocery sales grew at an annual rate of 14.1% over the last five years and they are expected to grow at a rate of 9.6% between 2014 and 2018. The growth of online retailing begs the relevance of traditional bricks and mortar. As online penetration pushes towards and beyond 10% of all purchases, real channel disruption occurs. The non-food items (e.g. health, cleaning) are disproportionately purchased online – 30% of online versus 14% in stores. Price comparisons and home delivery of the basics are only a click away.
Smart phones, with >50% of online transactions, and the proliferation of home delivery are now turbocharging the rate of change for online food and grocery purchases. Growers, restaurants, meal solution vendors, online retailers are all now tech-enabled retailers competing head-to-head for the traditional food spend.
Asia’s effect on direct sourcing
The third trend is the sharply rising food demand in Asia and its impact on direct sourcing.
China, soon to be the world’s largest economy and importer of food, entered into a staggering number of Free Trade Agreements in 2014, opening the doors for more food imports. China’s Ministry of Agriculture has issued a ‘Go Out Policy’ for overseas investments into food.
China’s online food shopping market already caters for more than 700 million smartphone shoppers, while home delivery (e.g. Alibaba, J.Com, etc.) is globalising the availability and connectivity of food vendors.
It is estimated that China’s online fresh produce purchases will reach over US$4 billion (£2.6 billion) in 2018. India will undergo the same transformation as retail spend doubles from US$350 billion (£230 billion) to US$700 billion (£460 billion) over the next five years. This growth, and in particular food spend, which is approximately 66% of the total, is fuelled by the recent take off of mobile apps, online shopping and home delivery (e.g. Flipkart, BigBasket, LocalBanyan, Foodpanda, TastyKhana, Just Eat, etc.) of groceries and restaurant meals.
Southern Hemisphere vendors now have a choice between the UK, the US and Asia. And Asian demand is surging. The UK is looking to be the least attractive destination. With direct sourcing and retail exclusive import buying brokerage, the vendor no longer has a loyal agent in the market fighting for fair representation on price and quality.
To the uninitiated global produce executive, strategies such as Asda’s International Procurement & Logistics (IPL) and Tesco’s Group Food Sourcing (GFS) seem brilliant. Preserve the cash cow and high margins of fresh produce with lower costs and supply efficiencies. The retailer, chasing lower costs, becomes responsible for the supply chain strategies and decisions while the vendor becomes removed from the consumer. But in the end, given the vagaries of weather, yield, costs, volumes, quality, etc., these strategies and supply commitments become more costly and complex to both retailer and supplier.
It seems that the most enduring model for supply-quality assurance is to leave product innovation and supply chain management in the control of the best supplier alliances. The supplier and retailer have a co-dependent relationship. If the consumer uptake stalls or shifts, then they both lose. The supplier understands this, understands the dynamics that drive it and is in the best position to manage the variables to restore purchase intention and sales velocity.
All too often it seems that understanding is one way.