James Walton, IGD’s chief economist since 2004, helps businesses to anticipate and cope with the economic, geo-political, social and environmental factors they face. In this post, he points out five hot spots for innovation and opportunity in the UK food and grocery industry during 2016; explaining why “microconvenience”, hybridisation and robotrucks are three trends in particular set to shape the fast-moving consumer goods (FMCG) sector
For food and drink retailers in the UK, 2015 ended as it began; with fierce competition, deflation undermining performance and weak overall volume growth.
Those pressures seem likely to persist into 2016. The wider strategic environment for UK businesses will probably continue to be challenging and the UK also remains vulnerable to risk from international events, such as tension in Europe, bad debt in Asia and spreading conflict in the Middle East.
But food and drink retailers also have reason to celebrate. Whilst growth and profit remain hard to come by the industry is performing strongly for shoppers. The majority of shoppers, 6 out of 10, enjoyed shopping in 2015, with only a minority saying they disliked it.
Shoppers seem satisfied with key elements
But what will be hot in food and drink retail in 2016? Our top four are listed below. Retail Analysis subscribers can see these innovations in action by clicking on the example links. Find out more about Retail Analysis here.
Hot spot one: “microconvenience”
After years of contraction the UK’s convenience store portfolio is expanding once more, with openings exceeding closures. Multiples such as Tesco Express and Sainsbury’s Local are driving this.
Many of the best sites for modern convenience have already been acquired and developed. Prices for the remainder may be unaffordable so operators must be flexible and inventive in order to expand further.
New openings may be smaller than the usual 3,000 sq ft max with microconvenience stores of around 1,000 sq ft.
Such stores are already commonplace elsewhere in the world (Hong Kong, Japan), but successful operation requires advanced logistics, clever ranging and space management skills.
Hot spot two: retail hybridisation
Microconvenience stores also provide a platform for another key trend – retail ‘hybridisation‘. This uses physical stores to bridge real-world and digital operations, for example by offering pick-up points for online orders.
Retail hybridisation also describes the development of stores which offer both retail and foodservice, either through partnership with specialists or not.
Foodservice can offer shoppers product customisation, instant satisfaction and foody values and growth in that sector is outpacing food retail at present.
Hot spot three: go faster, way faster!
Online retail continues to develop across multiple markets, with particular attention being devoted to quick and flexible fulfilment.
Services such as Argos Fast Track and Amazon Prime Now are great examples of development in fulfilment streams; Argos offers same day delivery for small items to 90% of households, 7 days a week, while Amazon delivers food and drink in under an hour for £6.99, or under two hours for free to Prime members in certain locations, with a minimum basket spend.
The examples shows that Amazon is now moving into territory previously dominated by convenience stores and foodservice operators (e.g. pizza delivery) and it is possible that in the future online may be quicker and more convenient than shopping in-store – at least some of the time.
Hot spot four: robotrucks
For many, the major obstacle to profitable rollout of online shopping is the cost of delivery, especially in a very transparent and price competitive market.
The bulk of logistics cost is incurred in the final section of the product journey which is the most time and labour-intensive part of the puzzle, so automation including robot staff and driverless vehicles offers a way around this.
The UK is a leader in development of driverless vehicles and road tests have already taken place. Looking ahead, it is easy to envisage much of the work within food and drink supply chains being done by fleets of such vehicles – large ones on the motorway and small ones to cover the final leg to the shoppers’ door.
Hot spot five: health
Health and good nutrition are still high priorities, not just for shoppers but also for government.
A new government Obesity Strategy is expected in 2016. It is not yet clear what it may contain, but it will presumably include measures intended to reduce calories consumed.
This may be seen as a threat to food and drink businesses, but it might also represent an opportunity for innovation and product improvement.