Price and Value Continue to be the Focus in the UK Grocery Retail Sector

Author: Emma Gough - Senior Consultant Promar International and Committee Member of the CIM Food, Drink and Agriculture Group

The latest CIM FDA event, held in London at the end of November, hosted a packed audience, all eager to hear what Fraser McKevitt from Kantar Worldpanel had to say about the UK grocery retail industry. Emma Gough, Senior Consultant at Promar International and Committee Member of the CIM Food, Drink and Agriculture Group reviews Fraser’s presentation.

Pictured: Fraser McKevitt from Kantar Worldpanel

In a year that has seen its fair share of economic and political complications, the development of the retail sector during 2016 was never going to be plain sailing.

Over the last two years, growth in the UK grocery sector has remained fairly low with just a +0.7% increase between 2014 and 2016.  Within the sector, itself though, there has been a shift as to where that money is being spent.  The discounters, Aldi and Lidl, have seen their combined market share increase from 3.8% in 2006 to 10.7% by 2016.  Kantar are forecasting that by 2020, this figure could reach as high as 14%. 

This has been driven by a combination of factors, such as the fact that discounters are now very much considered as being mainstream grocery retail channels.  Their ranges have extended and improved with a greater focus on value, alongside price. This has resulted in a higher spend per trip by consumers.  As an example, Aldi and Lidl’s two ‘luxury’ brands have seen growth of +16% for Specially Selected (Aldi), and +18% for Deluxe (Lidl) over the last year.

Supermarkets have seen a loss of £340 million ‘main shop’ sales from consumers, over the last year, which instead has moved towards discounters.  In addition, a further £208 million ‘main shop’ sales have also been redirected towards online channels by the UK consumer.  Although these are still relatively small values in comparison to the overall grocery retail sector value, it does indicate how the direction of spend is changing within the industry.  With the rise in discounters, 2016 has also seen a return to cheaper products and volume growth for the industry.  Tesco helped to drive this partly with the introduction of their Tesco farm brands earlier this year.

2016 has also seen a number of other key factors impact the industry:

Tesco
Tesco’s growth level is up 2.2%, with this very much being volume led.  Their main focus has been about ensuring they get their fresh produce and protein requirements right to attract consumers into stores.  Over the last year, Tesco has seen consumers “switch spend” an additional £87 million that they had previously spent with other supermarkets - although they did lose out on some sales to the discounters.

Promotions
Over the last few years, annual promotional levels within the UK grocery sector have started to plateau.  In 2016, these levels fell to meet the same level last seen in 2010.  In 2014, 34% of promotions were linked to volume deals, this has fallen to just 25% in 2016.  In comparison, focus has been on price cuts, with this type of promotion accounting for a 64% share in 2014, up to 73% in 2016.

Online
Growth in online grocery retail sales is starting to increase again. In 2014, growth was at +20%, with a +8% growth rate in 2015 and a +9% rate in 2016.  This has been driven in part by Tesco increasing their minimum basket size for online orders.  In terms of future growth within this route to market, it is difficult to realistically expect a return to the double-digit levels, as people who want to undertake online sales currently already probably are, and the key target market of young families is close to saturation.

The consumer
Coming back to the end consumer, it is these who drive and determine grocery shopping trends.  This is clear in the range of NPD taking place over the last year.  Consumers have more money now, but less time to spend it.  They are looking for quick and efficient solutions to meal occasions and are willing to pay extra for the privilege. This is particularly important when there are a greater proportion of consumers living in smaller person households now, than in the past.  Health and wellness are driving sales, with food and drink purchases in GB chosen for health reasons accounting for £20.1 billion of sales.  The nation as a whole is trying to get healthier with more products having less sugar and calories, but higher levels of positive nutritional elements, such as protein and fibre.

What next?
Looking ahead, with the implications of Brexit still unclear, Kantar are forecasting a number of potential changes within the industry in the future, including:

• Product prices to rise by the end of 2016.
• Retailers focusing on value engineering to ensure they do not lose round £ pricing structures.
• Stable volume sales, but with a greater lean towards own label.
• With a current booming, out of home market worth £45 billion, this sector could take a hit in sales over the coming year

In conclusion, 2016 was another highly challenging year for the grocery retail sector.  With the discounters continuing to take market share from the traditional Big 4 retailers, their growth, although slowing, does not yet appear to be finished.  Although it is difficult to truly understand how Brexit will affect the economy and the sector, it is clear that value and pricing will remain a key focus for the industry - at least in the short term.