Many of the challenges facing the grocers were magnified over the Christmas trading period. Alex Lawson looks at why big names suffered and who managed to win sales.
When Sainsbury’s boss Justin King described Christmas as the worst in his 30 years of food retailing last week, the statement’s veracity could have been called into question by some because it followed several positive trading updates from private grocers. But by the time his quoted rivals had reported on their festive trading, his comments were laid bare as cold, hard fact.
Plummeting like-for-likes at Morrisons, falling comparable sales at Tesco and stark BRC data all combined to paint a picture of a rotten Christmas for food retailers.
The three-month weighted average from October to December showed food sales fell 0.6% and it was among the worst performing categories over Christmas, according to the BRC-KPMG Retail Sales Monitor.
Food retail was hurt by a combination of factors. Inflation slowed in December while money-off vouchers tested customer loyalty in the extreme.
Shoppers’ spending remained under intense pressure as an uptick in consumer confidence failed to translate into real earnings and spending growth. Asda was among those to state that customers have no extra money in their pockets.
The grocers also struggled to cope with a promiscuous festive consumer, who is harder to market to.
Many of these trends are here to stay and 2014 will be the year in which the grocers attempt to create a new form of loyalty, be it through marketing, changes in price perception or rewarding omnichannel shoppers, and they will ensure the shopping experience is enticing. It is clear the customer is less willing to spend than ever, making every pound more important.
Squeezed middle
A glance at the trading updates so far reveals the key retail themes of 2013 were borne out at Christmas. Shoppers continued to seek out premium food, exemplified by strong numbers for Waitrose, Marks & Spencer and Booths, while the hard discounters thrived in a polarised market - Aldi and Lidl both made positive noises about their trading.
Which leaves the so-called ‘squeezed middle’ - the big four grocers, Sainsbury’s aside, struggled to fend off increased competition and defend their market share throughout 2013.
It appears these trends, as well as a boom in convenience shopping, were writ large during the golden quarter.
However, these wider developments supplemented some important individual circumstances at several of the UK’s largest retailers.
For the largest of them all, Tesco, it was a familiar tale. Despite offering a flurry of money-off vouchers, the grocer, which, lest it be forgotten, has a 29.6% share of the market, failed to charm shoppers as like-for-likes slipped 2.4% over Christmas.
Chief executive Philip Clarke blamed “further weakness in the grocery market as a whole” and the continued drag of its beleaguered general merchandise arm for the festive slowdown. He said Tesco’s plan to revitalise its stores is on track.
Oriel Securities analyst Jonathan Pritchard calls for action. “It is clear something more radical is required to change customers’ view of the brand,” he says.
Pritchard does not believe a price campaign is the answer but notes Tesco will likely be afforded some breathing space this quarter against comparatives impacted by the horse meat scandal last year.
Trading trends
Asda, meanwhile, is also likely to have been hit by the market forces putting Tesco under pressure. Still without a definitive answer to the hypermarket store conundrum posed by non-food sales moving online and attacked by the discounters on price, Asda is fighting hard to communicate its value position. Shore Capital analyst Clive Black believes Asda will have had a “solid” Christmas - and the retailer said it had achieved record footfall levels on December 23 - but its trading will not be reported on until late February.
For Sainsbury’s and the Co-op, the festive season represented an impressive achievement in the face of adversity. Sainsbury’s battled a “very tough sales environment throughout October and November”, King explained, to record its “best ever Christmas” and keep King’s much-vaunted 36-quarter-long like-for-like sales growth record intact.
The Co-op’s circumstances are altogether more specific. Fighting to rid itself of the controversy that enshrouded the group following allegations about former bank chairman Paul Flowers, the mutual delivered a 1% increase in like-for-likes spurred by a 3.2% like-for-like uptick at its convenience arm.
The trend echoes that seen elsewhere. Sainsbury’s and Tesco’s small stores came into their own as customers left it late to pop in to shops for last-minute items. Co-op retail boss Steve Murrells said its busiest day was Christmas Eve and that “these results are a reflection of all our efforts to improve the customer offer and show the value of our strategic focus on
convenience retailing”.
A crucial year
As Tesco reinvents itself, Clarke has already said that 2014 will be the “year of the hypermarket” as the grocer invests in remodelling 60 to 75 of its Extra stores.
However, analysts will be pleased to see Tesco at the vanguard of one key trend that shows no sign of abating - multichannel. It is estimated Tesco holds almost half of the online food market and it has invested significantly in click-and-collect to capitalise on shoppers moving into the channel.
Danielle Pinnington, managing director of shopper research agency Shoppercentric, explains multichannel will remain vital in 2014.
“Waitrose, in particular, was strong at Christmas as people who may not have shopped online for food picked up John Lewis orders in store and bought extra items at the same time,” she says.
As all the grocers look at new ways to access shoppers using multichannel - including using lockers at tube stations - 2014 could prove definitive for the grocers as they target online food market share as well as profitability.
Pinnington believes the growth of the discounters will continue unabated. “There will be a limit to what they can achieve but we are nowhere near that as they open more stores and increase awareness,” she says. “The challenge for the big four is to communicate value as well as advantages in service and store environment.”
The year ahead could also see change at the top with Clarke and Morrisons boss Dalton Philips under pressure and frequent speculation that King may be eyeing a departure from Sainsbury’s helm.
The market is not looking likely to get any easier, so the grocers will have to be on top form to weather the challenges.
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