Speaking at the PMA Fresh Connections event in Cape Town, South Africa, yesterday (August 12), the one-time King of the UK retail jungle once more bared his teeth at the competitors he left behind and sharpened his claws for an entertaining roam through the retail landscape
The biggest driver of the shifting retail dynamic in the UK market has been quality, not price, according to former Sainsbury’s CEO Justin King, who ran the London-based chain from 2004 to 2014.
King, who has also held senior positions at Asda and Marks & Spencer (M&S), says there has been widespread misunderstanding of the reasons for the changing purchasing behaviour of UK consumers, not least in the media, which has largely taken the line that lower prices at Aldi and Lidl have driven shoppers away from the big-4 grocery chains.
This misinterpretation of what’s happening has led to the wrong conclusions being drawn about what the future holds for both the UK and international marketplaces, King told a produce industry audience during a session entitled Retail Revolution.
He trawled through the progress of key players in the UK retail market over the decade he was at the helm of Sainsbury’s before his departure last year. Sainsbury’s, he claimed, was the “best performing grocery retailer by a country mile in the last eight years”, because it struck the best balance between quality and price, and therefore gave the consumer the value for money they were looking for.
“Sainsbury’s has focused on quality and that dimension of value for money, not to the exclusion of price, but with price less in the weight of emphasis,” he said. “That value for values approach has worked. The customer is not prepared to give up on the things that are of value to them.”
On his arrival, King admitted, he found it strange that Sainsbury’s still thought of itself as number one even though it had lost that position in 1994-95. Having issued five profit warnings in his first year at the helm, he wryly observed that 10 years further on, Tesco is currently at five – “the rule of thumb for profit warnings” – and speculated whether there might be a sixth.
Digging more into the detail on the chain that was his biggest rival throughout his time at Sainsbury’s, he added: “If you look at the big bad bully in the playground. The most interesting stat is that in [the last 10 years] they have opened up more space than the entire size of Morrisons today. Do the maths on sales density and then ask yourself why Tesco may have a few profit issues. Tesco themselves have said they are “running hot” which I would translate as not giving the customer fair value for money.”
Tesco faces a “long, long haul”, he added. “Retail turnarounds are not insignificant things and the underlying base is that in the last six months, Tesco has been making no profit at all.”
When he took over at Sainsbury’s, King claimed that the board at Tesco had written off its then largest rival as a failing entity, and switched all of its competitive focus onto Asda, which had recently been acquired by Wal-Mart and seemed to be signalling a significant upscaling in the high street price war.
“Asda was surely the best equipped [to prosper during the financial downturn] yet it is finding it harder than anybody,” King said. Because a larger proportion of customers do their main weekly shop at the Leeds-based chain’s than any of its rivals, he suggests the big challenge has become that they find it difficult to attract “truly new shoppers”.
“That is the hardest thing for any retailer to do. Getting more money or extra visits from your existing customers is far easier.”
Down the road in Bradford, Morrisons didn’t fare much better in King’s assessment. Morrisons has had a spectacular run of three to four years of decline, he says, adding that the struggle to integrate the Safeway business into Morrisons continues – “you could argue that they still haven’t merged”, said King. “Morrisons has still never made the profit that the two chains combined made before the merger,” he added. The big lesson is that merging two retail chains “is a really tough thing to do”.
King argued that format and proposition are key to the success of any retailer and the fact that every Morrisons store had previously been signed off by either Ken Morrison, his father or grandfather made it even more difficult to bring in 400 stores that had been ‘signed off’ by other people with very different values and ideas.
Waitrose and M&S were largely brushed aside in the 45-minute session, as King contented himself with the aside that both have grown through the tough economic years, while citing this as proof of his overall thesis that “it can’t be all about price”.
The man who frequently could be heard to refer disparagingly to Aldi and Lidl as “the German discounters” during the years when they became the darlings of the UK media (“I felt it got me an edge”) said they too have not grown due to their prices alone.
“Quality was the key driver of discounters’ growth – not their price proposition. Consumers began to see value for money in a different way. They would do a slightly smaller weekly shop, but they worked it out. Fifteen years ago, he said, generally you would not buy fresh produce from a c-store, but consumers switched to smaller stores largely because Tesco, Sainsbury’s and M&S improved the fresh offer in their smaller formats so much. The argument that if you didn’t shop in the morning, you shouldn’t expect to find the best gear no longer washes either, he joked. “The ability to deliver against the fresh expectation was pivotal [in the rise of the convenience and discount chains],” he said.
“The discounters got so much free publicity from [the British] press,” said King. “But they spotted the trend. They realised that putting their shops where the people weren’t was not a good strategy and started to open shops where people lived. Virtually every new Aldi or Lidl was opened on a roundabout within a quarter of a mile of a major supermarket and they parasited the consumer footfall.
“The range in Aldi in the UK is twice what it has in Germany. Their story has been at least as much about the quality of their fresh offer as their prices. That has been their winning strategy and the same has been true of [some] convenience [chains].”
He urged his audience not to follow the media’s assertion that this is the age of the discounter. “The discounters have actually been in the UK for 30 years, people seem to forget that,” King says. “Their market share peaked in 1992, they have not yet got back to those peaks.”
The Co-operative missed the boat somewhat, he added, although it is now, for the first time in 45 years, in real market share growth. “It is astonishing that they have missed five to six years of the opportunity to take advantage of consumer trend moving towards top-up shopping.”
Having taken a partly playful swipe at many of his erstwhile rivals, King turned his attention to the wider picture and agreed with the summation of this recent piece on Produce Business UK – that reports of the death of the weekly shop have been greatly exaggerated. He said that the newspaper headlines based on an IGD report last year would have been more accurate – if less catchy – if they had said that the growth of the weekly shop would stop. IGD in fact said that the weekly shop accounts for £125 billion of the £175bn grocery retail market now and will remain static at that £125bn figure while the overall market rises to £200bn by 2020. The growth, said the think tank, will be seen through the top-up shoppers at discounters and convenience stores and through online channels.
“It is still a significant shift for an industry that has been on the up escalator for the last 40 years,” said King. “If you just stood still in that time, your business would still grow. But when that escalator is switched off, the chances are some people will trip or stumble and Tesco, for example, has done that. It is very disconcerting.”
He pinpointed the time when that switch was flicked to one quarter in 2010, when the protective cloak that many UK consumers wore at the beginning of the recession was blown away by interest rate rises, oil price hikes and exchange rate fluctuation. “The average weekly shop went from roughly 20 items to roughly 19 items,” he said. “That might not seem like much, but even over five years it would have brought catastrophic change. It all happened in one quarter and changed core grocery overnight.”
Grocery retailers of all description have been investing in online channels in recent years, of course, but King believes evidence of a customer’s connection between physical store and online presence is too strong to dismiss.
“Is the internet really going to take over the world?” he asked. “After 15 years and billions of pounds of investment, Ocado has lost £10 for every doorbell it has ever pressed. Online has a 5% share of the UK market, which means that 95p out of every pound is still being spent by a real customer in a real shop.
“I think it will perhaps double in the next five years. But the best in-store customers are the best online shoppers and still less than 250,000 households do more than half of their food shopping online.
“It’s a minority sport.”
Morrisons, which has been targeting its online efforts at areas where it is not strong with physical stores, has got it wrong, said King. “They should forget places where they don’t have stores – go where their best customers are and they are more likely to buy from them online too.”
Access to accurate customer information has made a fundamental difference to understanding issues such as this for companies like Sainsbury’s [through its Nectar cards] in the last 10 years. King cited an experiment in Leeds – which given his Asda past he claims to have taken some personal pleasure out of – whereby Sainsbury’s stopped its online offer for a period to see what impact it would have on sales in the area. “Our stores sold less,” he said. “It’s dead simple – if you’re not familiar with the product then it’s really hard to shop online. You’ve got to know what you’re looking for and if you can’t go into an actual store, it becomes a real bind,” he said. “The opposite is also true. When we started targeting our most valuable in-store customers with vouchers for our online offer, store managers complained that they would lose sales. But we knew that it would encourage them to buy from us online.
“Only data can give you that type of insight. Morrisons is trying to catch up, but they don’t have the data. Our data told us that of 70 stores Morrisons opened, only two made sense. And if you don’t put that shop in the right place first time, sooner or later someone else is going to come along and take that space.”
Suppliers to supermarkets should not think that understanding consumers is purely the job of the supermarkets though, he said. “Our job as retailers is to represent the customer to you. We can be on your side, but that can only go so far, because we are the intermediary for the customer and that’s the side of the table we sit on,” King told the audience. “Ask what the consumer is telling you. Don’t believe what you read in the press – ask them. They have worked it out and they know what they want.”
He also claimed that the UK market remains one of the safest options for suppliers in sub-Saharan Africa. “Look at China and Russia – they have sneezed and a lot of the world has caught a cold,” he explained, before also blaming the milk prices in the UK on Vladimir Putin’s policies. “You should think long and hard about the markets you are dealing with in the world as it is now. The UK is very unlikely to experience the type of disruption [that other countries face now].
“There is a lot of opportunity for South Africa to be a long-term and sustainable competitor in the European marketplace. I’ve always thought there is a lot grown in Spain that could be nicked by South African producers.”
And on that contentious note, King left the stage and hurried out of the auditorium without taking questions.