With almost half the year gone, what challenges are the supermarkets facing for the next six months and beyond?
By Blackdog - about 2 months ago
The phrase ‘a perfect storm’ must be one of the biggest and most overused cliches, but it seems perfectly reasonable to suggest that this is just what British food retailers find themselves in. Having expertly navigated the huge stresses and strains of the pandemic, complete with surges in demand, the need to hire tens of thousands of extra bodies and dealing with all sorts of supply chain volatility, the UK’s grocers now find themselves facing into what will be the most pronounced and sustained period of inflation in living memory.
Prices Under Pressure
This inflationary surge is already creating problems, both internally and externally. On the internal front, retailers are already having to deal with rising costs for fuel and electricity together with more ambitious wage demands from their employees. Externally, they are having to face up to the fact that they have little to no choice in terms of accepting price increases from their suppliers.
The supplier perspective is an interesting one. Anecdotally it sounds as though most suppliers have taken a sensible approach. Rather than going in all guns blazing with blanket price increases across the board, they have passed on input cost inflation selectively. They are also seeking to plan ahead by considering opportunities in pack sizes and promotions rather than looking to land price increase after price increase.
For retailers, a little bit of inflation is generally a good thing as it flatters the top line. But in such a competitive marketplace, retailers are having to fight very hard in order to maintain competitiveness. Some of the biggest supermarkets, like Sainsbury’s and Tesco, claim that they are holding back inflation as much as they can, but there can be no doubt the higher prices are filtering through to shoppers’ baskets, and our old friend shrinkflation is doing the rounds too. In an era of unparalleled choice and near perfect price visibility, all the major retailers will have to be very, very careful about how they pass on inflation to their customers.
Discounters Back on the Front Foot
A lot of this caution will be due to the fact that the limited assortment grocers, like Aldi and Lidl, are once again ramping up their physical expansion as they see shoppers return after they were shunned during the pandemic due to their small stores and compact ranges. Their unique operating model means that they will always be the price leaders, so for the big supermarkets it remains a case of ensuring that the price gap doesn’t widen too much and that they give shoppers fewer reasons to desert them. Indeed, the big four are in a much stronger place than they were in 2008, with much improved loyalty schemes, radically overhauled private label ranges, and three of them offering decent price match schemes against a couple of their discount competitors.
More Big Changes Ahead
As if all this wasn’t enough, this October will see the implementation of the regulations on the display of foods high in fat, sugar and salt. With HFSS products no longer allowed to be displayed at store entrances, on gondola ends or at the checkouts, many of the supermarkets have already been working hard – both in terms of finding new occupiers for these in-store hotspots and collaborating with suppliers and shopper marketeers to try and find new ways to activate demand in-aisle in categories such as soft drinks, biscuits, confectionery and savoury snacks.
Categories like chocolate will undoubtedly be dealt a body blow as they rely on gondola ends and on-floor displays for a huge chunk of their volume. It seems as though other HFSS categories are probably in a stronger place, having already reformulated swathes of their ranges to become exempt from the new laws. What looks almost certain is that the major beneficiaries of the new laws will be the suppliers in beers, wines and spirits who have the appetite and budget to take over a lot of vacated space, and we’re already seeing some of them land some impressive kit in certain stores.
Short-term Gain, Long-term Pain?
In the face of all these challenges, a number of the big supermarkets have embarked on radical cost-cutting programmes, which have seen them close counters and manned check-outs and cull night shifts. While this makes total financial sense in the short term, one could suggest that this has removed points of differentiation and diluted or even worsened the shopper experience. This so-called ‘race to the middle’ is something that we’ve seen in other markets around Europe a decade or two ago. Many supermarkets in discounter-dominated countries, such as Germany, France, Poland and Spain, realised the error of their ways. Instead of continuing to cost-cut their way to mediocrity, they instead invested more in all the things that discounters can’t do: more counters, more service, more differentiation and more experience. Whether or not UK supermarkets will follow suit remains to be seen, but there must be at least a small degree of concern that removing many things that could be used to justify a more premium price positioning is possibly not the best answer in the long run.
The Importance of Values Alongside Value
Where some supermarkets have impressed is in terms of their ongoing commitment to initiatives around sustainability and healthy eating. This hopefully serves as a reminder that values can be just as important as value, and that, although issues such as the environment might drop down some shoppers’ agenda against a backdrop of economic hardship, they are still important to significant numbers among the customer base.
Whether it’s Tesco’s recent Better Baskets campaign – a project Blackdog has been involved with – which has made it easier for shoppers to make smarter choices for their families and for the planet, or Asda’s introduction of refill zones in a number of its larger stores, we are heartened to see that sustainability is still at the forefront of supermarkets’ thinking, which should put them in a relatively good place when we get through a tough 2022 and, fingers crossed, return to a more even keel in the following year.