It is undeniable that the grocery sector is white hot with both opportunity and activity.
Although a mature market, the ecosystem has faced rapid and unprecedented change in customer preferences and behaviour in the past 18 months.
With the pandemic serving as a powerful catalyst, more than ever UK grocery retailers cannot afford to be complacent or they risk losing their competitive edge.
In the past decade, we’ve seen the domination of the big four grocers increasingly challenged by other market operators, from discounters to convenience retailers and even delivery services.
The market remains one of the most competitive in retail, with grocers monitoring their performance against competition in extreme detail as the battle for the weekly shop continues.
Expansion and renaissance
Changes in consumer behaviour, including the trend towards smaller basket sizes and more frequent, local shopping, have led grocery retailers to invest in convenience channels and expand their non-food offers.
The trend has also led more recently to a renaissance of independent shops and world-class grocery delivery. We see this provided by businesses such as Amazon, Deliveroo and Just Eat, as well as new entrants to the market such as Gorillas and Getir.
“[Their pandemic response] showcased the key attributes of grocery retailers – aware, nimble, innovative and, as always, resilient”
During the pandemic, many were quick to adopt new policies to respond to a new shopping priority – safety – and to ensure socially distanced shopping, special prioritised shopping times for critical workers, improved hygiene standards, and to open up further online delivery capacity. This showcased the key attributes of grocery retailers – aware, nimble, innovative and, as always, resilient.
Over the past year and a half, many grocers’ financial performance spiked in lockstep with imposed Covid-19 restrictions. That was initially prompted by panic buying, before later they were among the few retail locations where people could shop for both food and non-food categories.
The private investment community has responded by intensely scrutinising opportunities to enter this category, reflected in examples such as the current bidding war for Morrisons, the acquisition of Asda by an investor consortium, and even speculation about Amazon eyeing Tesco as a potential acquisition target.
Sainsbury’s has also been tipped as a potential takeover target. Ocado is another hot prospect, consistently delivering the biggest month-on-month growth, according to Kantar Worldpanel, and offering an opportunity for market consolidation through acquisition of online shopping infrastructure and brand awareness.
Future value
The attractiveness of the sector is complex. With tight margins, high real estate and distribution costs, the intensity of supplier relationships, complexity of category management and channel evolution, the critical nature of sustainability priorities, and the need to continually innovate, it seems counter-intuitive that it would be so attractive.
However, the battleground in UK retail overall, and especially in grocery, is at its heart one for customers and their future spending.
This is where grocery retail really delivers – regular footfall and fingerfall, a regular shopping basket that can be built to accommodate higher-margin categories and additional services such as banking that retailers are increasingly providing.
“It will be critical to adjust the grocery value proposition to changing behaviours”
The outlook for this sector is very exciting, and I predict more deal activity here, but it will be critical to adjust the grocery value proposition to changing behaviours in order to ensure maximum margin is delivered alongside maximum customer satisfaction.
The next year for grocers will be a challenge to annualise lockdown outperformance, find ways to repurpose space where there is a surplus, make online grocery picking and delivery profitable and scalable, maintain a stable workforce and manage the headwinds of commodity price increases.
The sheer scale and customer reach of these companies, and the companies that serve them, will keep investors and deal-makers busy for years to come.
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