Tough love for grocery: Time to kick the new-store growth habit

October 12, 2015; 00:16 am by Bill Bishop

Is the US supermarket industry overbuilt?

This is a big question and a tough conversation. Key players in the UK supermarket sector are already confronting it, and many markets in the US will soon follow if they are not already there. Figuring out how to respond requires systematic rethinking of the entire organization’s function, from the head office down to the number of SKUs stocked in any given category. To start the conversation, I reached out to Will Treasure, Director, Operations for The Javelin Group, a part of Accenture.

Javelin Group is a consultancy that has been developing ecommerce solutions for UK grocery retailers for many years. Their recent white paper, How many supermarkets will we really need?, frames out the situation and discusses what must be done to prevent further erosion of market share, to decrease costs and to reinvent store spaces.

BMC: What prompted The Javelin Group to address this question?

Will Treasure: It’s been clear for a while that the UK supermarkets’ traditional way of growing, by adding new stores, was under pressure.  Same store sales by volume have been falling for a while, and dollar sales by store have been increasing only due to price inflation.   This was less of an issue when supermarket chains overall were gaining market share, but for the last two years they have lost market share, mainly due to the growth of the hard discounters like Aldi and Lidl and the Pound stores, which are similar to Dollar General and Dollar Tree in the US. 

Until recently, the restrictive planning permission in the UK meant new sites for stores were hard to find, so a large landbank of potential sites was a competitive advantage and a way to lock out competitors.  All the large UK supermarket chains have built pipelines of land for new stores, and they have large teams whose only function is to buy land, and build and open stores.

It’s been very hard for these supermarkets to get off the ‘growth drug’ of new store openings.  We wrote this paper because we think that all supermarkets need to address this issue. It is one of the most pressing concerns they face.

You have focused on the US market for the last year or so. Do you think the question has relevance for US supermarket chains?

Yes, because the same five trends that are creating the problem in the UK also exist, at least to some extent, in the US:

• The slowdown in supermarket sales due to the rise of competition from hard discounters and Pound stores seems very similar to what is happening to mainstream supermarkets in the US.
• The movement of grocery sales from stores to online. Six percent of all grocery sales in the UK are made online. So far the shift in the US has been much smaller – on average 1% - 2% – but from where we sit, it looks like it’s poised to take off.
• The rise in convenience (neighborhood) grocery stores.  We see convenience retail as a vital and growing retail vertical in both the US and the UK.
• The reduction of non-food sales in hypermarkets as customers buy online.  Certainly we see a similar trend in the US, especially with many of the CPGs.
• The price war created as grocers cut their prices and margins to compete with the discounters.  You’ve yet to experience price wars in the US, but the pressure on margins is evident.

As the impact of these trends continues to grow in the US, we feel that the challenge will be similar to the UK, and that the major chains will not be able to continue growing simply by opening large numbers of new stores.

What did the big UK chains do to minimize the impact of these trends?

The immediate reaction was to slow the openings of new stores. All the chains have cut back on supermarket openings, some very dramatically.  There are cases where brand new stores have been completely built and fitted out, but now they sit mothballed because opening and operating them will cost more money than leaving them closed.

Your paper explores in some detail the two developments that have contributed the most to the current situation: the growth of ecommerce and the expansion of discounters.  Would you tell us how each of these is contributing to the problem?

Let’s start with the expansion of discounter because they have been the primary driver of the problem for mainstream UK supermarkets. The supermarkets inadvertently prepared the way for discounters to grow so vigorously. They made a major mistake by increasing their margin to compensate for declining sales just as the hard discounters started focusing more heavily on middle class affluent shoppers and stocking more aspirational products. In the UK, there has been a massive shift of shoppers from supermarkets to discounters, with discounters market share almost doubling in four years. 

At the same time, online grocery shopping has been growing consistently at 15% per year.  Because this is exponential growth, the impact gets bigger each year, so online sales are likely to be an even larger driving force in the future.  The more online sales grow, the less need there is for customers to shop the stores, and as a result, more stores will become redundant.

How do you see this playing out for UK food retailers?

The impact will vary. The more differentiated stores at the top and bottom of the market will do well, while the mainstream supermarkets will struggle. Upmarket retailers like Marks and Spencer and Waitrose, are still growing, and so are the discounters at the other end of the spectrum – who are capturing a surprising level of market share.  The mid-market retailers like Tesco, Asda (Walmart), Sainsbury, Morrisons and the Co-op are challenged. Margins, growth and profitability are all under great pressure.  It is hard to see all of them surviving in their present form in 10 years’ time. In fact, by 2020 it is quite likely that the UK’s Big 4 will become the Big 3.  They all have very strong and talented management, and retailers have been brilliant at re-inventing their business as the market changes, so who will not be part of the landscape is anyone’s guess.

What do UK food retailers need to do to survive and prosper in the face of this challenge?

Here are several steps, many of which could translate to US supermarket organizations as well.

1. Recognise the challenge (which, to be fair, they are doing).
2. Invest wisely in the growth channels of online and convenience.
3. Conserve capital, as the strongest balance sheet will survive.
4. Take costs out of the head office and distribution.
5. Innovate, not just incrementally.
6. Look after your customers in every decision.
7. Be prepared and ready to take advantage of strategic opportunities as competitors struggle.