UK food retailing and the challenge of the ‘new retail’
Alan Treadgold is a London-based global adviser to retail businesses.
He recently provided this guest blog.
In mid-August, ASDA, the UK’s third largest food retailer by sales, announced its worst ever sales results. Like-for-like sales in stores open for more than one year (a standard industry measure) fell by 7.5% for the three months to the end of June. That was even worse than the 5.7% decline reported for the previous quarter and the 5.8% decline for the quarter before that. In fact, ASDA is now in a period of 8 consecutive quarters of declining like-for-like store sales. For a food retailer, sales declines of these levels are calamitous. Profit margins are very slender at the best of times (and these are most definitely not the best of times for the major grocery retailers in the UK) and big losses of sales volumes get strongly magnified in terms of their impact on profitability. And yet on exactly the same day that ASDA was confirming just how bad its sales position is, Amazon announced that it would open in early 2017 another fulfilment centre – its thirteenth – in the UK. Part—but only part—of the reason why Amazon needs more capacity is due to the initial success of its Amazon Fresh food delivery business which launched in the UK in July 2016.
So what’s going on? Is ASDA’s trading difficulties and Amazon’s continued expansion an illustration in a nutshell of a transformation from the store-based world of ‘old’ retailing to the online world of ‘new’ retailing? Well, yes and no.
For ASDA the conundrum is that, as arguably the most consistently price focused of the major UK grocers, the business ought to be trading better than it is in the face of strong competition from the aggressive price-led grocery discounters, Aldi and Lidl. The fact that it isn’t points to big structural challenges. Price deflation is a structural feature of the UK grocery retailing marketplace. It is almost impossible to increase prices to shoppers who have a growing range of shopping options, including online. And when you can’t – structurally – increase prices you have to have an offer and a brand that truly engages with shoppers in order to add sales volume, and you have to have a very, very efficient cost base. ASDA doesn’t appear to have the first and perhaps not the second either. At the same time as it’s trying to ‘fix the basics’ of its existing business, ASDA is also challenged to radically reconfigure its business to better fit with the very changed expectations of a lot of shoppers. What this means in practice is a very strong online ordering and fulfilment business as well as smaller stores in more convenient locations that work for busy shoppers wanting to buy smaller amounts of food more frequently and closer to the point of need. ASDA doesn’t have either.
For Amazon there is a sense of a business which continues to invest ahead of the curve in that the infrastructure is being built while the business works simultaneously to add more shoppers and more sales volume. Jeff Bezos has spent the entire history of Amazon preaching the same message to his sometimes impatient investors: stick with us and sustained profits will come as volumes grow. That’s looking much closer today than it did even a few years ago. In this sense Amazon’s challenge is the exact opposite of ASDAs. While ASDA is challenged by declining sales and loss of customer engagement, Amazon is dealing with the challenge of absorbing strong sales growth and more customer acquisition across multiple categories, including now grocery
Where will this end? It’s clear that there’s too much capacity in UK food retailing and the challenges are getting worse as the discounters grow and the online operators advance further. More large stores will close and more price competition seems inevitable which will further strain already marginal profitability and the patience of investors. Indeed, investor patience may be so tested that ownership changes will happen. Shoppers have more choice and retailers have more opportunities to realise them, but the transitional challenges are tremendous.
Alan Treadgold is the author, together with Jonathan Reynolds (CDRC), of Navigating the New Retail Landscape: A Guide for Business Leaders (OUP 2016).Back to Archive