The pressure on Britain’s leading food retailers has been underlined this week, with Sainsbury’s reporting a double-digit fall in profits and Asda scaling back its Black Friday discounts. So as grocery shopping undergoes its biggest revolution in a generation, triggered by the rise of discount retailers and online shopping, which retailer is in the best shape for Christmas?
Aldi and Lidl
The German discounters are the fastest growing grocery retailers in the UK by a significant margin, despite predictions that their growth would slow. The latest market share figures from Kantar show Aldi and Lidl sales are up 17.6% and 17.9% respectively year on year. The next best performing grocer is Iceland, which grew by 3.2%.
It took Aldi and Lidl 20 years to understand the UK market, but now they have reset the expectations for what customers should pay for groceries. There are likely to be bumps in the road for the discount retailers as some stores become overcrowded and some shoppers are turned off by the limited assortment of goods on offer in Aldi and Lidl.
However, purely on the basis that Aldi and Lidl plan to double the number of stores they have in the UK while the big four – Tesco, Asda, Sainsbury’s and Morrisons – halt new openings, it is easy to conclude the revolution they have sparked in grocery shopping has barely begun. In the next five years they are likely to double their share of grocery spending in the UK to 15%.
Marks & Spencer
The 132-year-old chain has struggled to grow clothing sales, but its food business is thriving, with sales rising by 3.3% in the past six months.
The basic explanation for the success of Marks & Spencer’s food division is that shoppers are combining cut-price purchases from the discounters with treats from M&S. The vast majority of products sold in M&S are own-brand, meaning it is not as vulnerable to a price war as the big four – and one in five of its products is a new item.
The company, which has successfully established a distinctive upmarket position in the sector, is also benefiting from the growth of convenience shopping and households not buying their food for dinner until that day. M&S has almost 550 Simply Food shops, many at train stations, which are popular lunch destinations for office workers but also a place to pick up food on the way home for work.
As ever, expect M&S Food to enjoy Christmas. The retailer will provide a quarter of the turkeys eaten on Christmas Day – an extraordinary proportion.
The upmarket grocer, part of the John Lewis Partnership, has suffered a decline in sales in stores open for more than a year in 2015, while its boss, Mark Price, has announced he will leave early next year.
However, the retailer is still growing profits and has become the most innovative in the market. Waitrose has remodelled its supermarkets and launched initiatives designed for what it believes will be the consumer of the future. These include “pick your own offers”, which allows customers to decide what they get a discount on, as well as in-store wine bars and free coffee and newspapers.
Sainsbury’s has reported a 1.6% decline in like-for-like sales and an 18% fall in underlying profits before tax, regarded as the definitive measure of its performance.
This underlines the pressure on Britain’s supermarkets: They are attempting to adapt to changes in shopping habits that have led to customers spending more money with the discounters, in convenience stores and online, rather than simply buying their food in one weekly shop.
However, the results at Sainsbury’s are better than feared, with the retailer formally upgrading its expectations for the financial year just over a month ago. The company’s pre-tax profits of £339m are way ahead of rivals Tesco and Morrisons, and far better than the £290m loss it reported this time last year when Sainsbury’s wrote off the value of underperforming supermarkets.
Sainsbury’s is well-placed for the Christmas season. It traditionally gains market share in holiday seasons owing to the strong reputation of its fresh food. But it is likely to be boosted further this year because in the period before last Christmas it reduced prices and angered customers by cutting the points they were awarded on their Nectar reward cards. This means Sainsbury’s will be comparing its sales against a weaker period last year, and its like-for-like sales figure should benefit as a result.
The budget retailer has made headlines for drastically scaling back its participation in Black Friday. It said this was in response to feedback from customers, many of whom would prefer Asda cut the price of food and drink rather than offer one-off discounts on electrical items.
However, cynics say it is an attempt by Asda and its US parent company, Walmart, to protect the supermarket’s profits. Asda reported a 4.7% fall in sales at established stores in the three months to 30 June, the worst performance in its 50-year history, amid fierce competition from the discounters and its rivals slashing prices and issuing millions of discount vouchers.
It is unclear how much this performance is due to Asda genuinely struggling or Walmart, the biggest retailer in the world, demanding that the retailer protects its profits rather than get dragged into a price war.
Asda was the first of the big four to recognise the rise of Aldi and Lidl and launch a fightback. In late 2013, it committed £1bn to cutting prices and revamping shops over the next five years. However, in a sign that Asda is concerned about its performance, last month it overhauled that five-year plan, announcing it would make further price cuts, accelerate improvements to its largest shops, delay the opening of new smaller shops in London and scrap plans to build more click and collect sites for online orders.
David Potts was appointed chief executive of Morrisons in February in an attempt to help the struggling Bradford-based supermarket return to the basics.
Critics argue that former boss Dalton Philips alienated core shoppers by trying to take the retailer upmarket, for example by installing in-store misting machines to cool the fruit and vegetables. Philips said this was not the case, insisting that Morrisons needed to modernise to meet the demands of its shoppers, particularly in the south-east and London. He said it also needed emphasise the fact it made much of its own products and was one of the UK’s biggest food manufacturers.
Philips suggested Morrisons was struggling because it entered the fast-growing online grocery market and convenience store sector later than its rivals.
Potts aims to get Morrisons back on track by tailoring the products in each supermarket to the demands of the local community, adding 5,000 staff to stores, making the company’s pricing and promotions simpler, and introducing in-store services such as mobile phone repairs. He has also closed shops and sold off the fledging M Local convenience store brand.
However, Christmas will still be tough. Morrisons said like-for-like sales were down 2.6% in the 13 weeks to 1 November, mirroring a miserable performance in the same period last year.
Britain’s biggest retailer also has the sector’s biggest problems. It is more than year since new its boss, Dave Lewis, arrived and a major accounting scandal was uncovered. However, despite the chief executive’s drive to cut prices, improve customer service, and close more than 50 struggling shops, Tesco remains in decline.
The company’s latest results showed a 1.1% fall in like-for-like sales in the UK, which is a smaller decline than Sainsbury’s. However, operating profits were just £166m. To put that into context, Sainsbury’s is making almost double the profit despite generating almost half the sales – £12.4bn compared with Tesco’s £21.6bn. This means that Tesco is throwing money at trying to win back sales, but with limited impact.
Tesco still has more than 3,500 stores in the UK, far more than Sainsbury’s 1,200. Lewis revealed this week that between 2007 and 2014 Tesco opened 35m sq ft of new shop space, the equivalent of twice the size of Asda today, but that group sales have gone nowhere during that time. As a consequence, Tesco is more exposed to the impact of changing shopping habits than its rivals.
This, coupled with the damage to the Tesco brand, a Serious Fraud Office investigation into the accounting scandal, billions of pounds of debt, and poor staff morale due to the scrapping of the company’s final salary pension scheme and job losses, means turning around the famous retailer will take years.
Lewis appears to be braced for a tough Christmas. Tesco enjoyed a better sales performance than its rivals in the 2014 festive season as the new boss enjoyed a honeymoon period. However, this was underpinned by issuing millions of money-off vouchers to shoppers and offering sharp discounts on Black Friday, which led to police being called to stores. Lewis says the company will not be repeating some of the tactics it used last year and will have to hold firm through what could be a testing time.