Andy Clarke: ‘Consumers haven’t felt the real pain yet, but they will’

It would be more realistic to view the last six months as a period when we have all had to readjust to different priorities, and change our behaviour and spending accordingly. 

But no one is talking enough about the economic costs of making these changes in lifestyles. 

So far, the government has stepped in with huge amounts of cash to keep people in their jobs. But how long can we go on like this?

What will happen when, as is coming sooner or later, someone has to pick up the tab and the real world of economics reimposes itself?

“2020 was meant to be the year in which the supermarket industry braced itself for Brexit. But everything changed overnight with the government’s decision to put us all into lockdown in mid-March”

With furloughing set to end soon, we are already seeing the first signs that many jobs will go, as businesses face a damaged 2021 economy without the short-term subsidies that have been forthcoming during the heights of the outbreak. 

Unemployment will obviously rise sharply next year, economic activity will probably recover at a slow pace and there is a real prospect that input prices will rise sharply as supply shortages, such as difficulty getting some crops harvested and weak sterling, have a negative impact. And I haven’t even mentioned Brexit yet.

2020 was meant to be the year in which the supermarket industry braced itself for Brexit, supply bottlenecks and product shortages. But everything changed overnight with the government’s decision to put us all into lockdown in mid-March. 

Paradoxically, 2020 has been a relatively buoyant year so far for the sector. Those early fears of shortages gave a major boost to spring sales volumes and neatly set the consumer psychology for the duration of the pandemic.

Across the whole food market, sales volumes are significantly ahead of 2019 as we all spend much more time at home.  

But handling this higher level of demand has not been easy or cost-free. All the big players have increased home delivery capacity, incurring significant extra direct costs in the process. 

Social distancing and anti-virus precautions impact the productivity of shops and the costs of customer service. Lower volumes further exacerbate the squeeze on profitability of legacy store portfolios. 

That’s why we are already seeing job losses and organisational restructuring. Longer term, there are big implications for shop rents and capital values.

So far, the rates holiday and the almost total avoidance of any promotional activity have gone a long way to covering these extra costs – and prevented any significant profits shortfall. 

“Consumers haven’t felt the real pain yet. But as and when they do, we’ll see a rapid end to the last six months’ comfortable acceptance of a ‘nobody rock the boat’ consensus on gross margins”

But the positive factors supporting volumes are likely to decline over the rest of the year, as people start to return to offices, children are back at school and consumers regain their enthusiasm for eating out and visiting the pub. 

Consumers haven’t felt the real pain yet. But as and when they do, we’ll see a rapid end to the last six months’ comfortable acceptance of a ‘nobody rock the boat’ consensus on gross margins. 

When that happens, look out for a renewal of rapid market share growth by the discounters. 

Aldi and Lidl have taken their collective foot off the volume pedal recently, but it is a basic principle that, in a competitive market, the lowest cost operator holds the cards. 

It’s no surprise they have shown comparatively little interest in building an online offer with universal home delivery – a million or two more unemployed will have plenty of time to do their own shopping.