World domination over for grocers

FMCG/retail sector is in a phase of transformation, the likes of which we have not seen before. Business stakeholders drive some of the changes while others are clearly coming from the outside. Business models nimble enough to adapt will thrive, while many others will be caught flatfooted and perish.

Here are five theses for the future of grocery:

1. The age of store based foreign expansion is over

In general it is very costly to establish a new grocery player in any market. Businesses need to find the right sites for stores and warehouses, and they have to obtain the permits and licences. They have to hire staff and negotiate supplier relationships, build up a customer base and their brand.

Often scale and efficiency gains are much harder to realise than expected. Moreover, it is very hard for new market entrants to become one of the leading national players. Usually, these positions are already taken and the players well established. And, finally what works in one country doesn’t necessarily travel that well to another.

This doesn’t mean that for grocers a retreat behind national borders or to existing markets is on the cards. It just means that most future foreign expansion will not be stores based. Instead it will be online and through partnerships (Amazon/licensing deals with partners such as Ocado).

2. The discounters will become the biggest retailers by sales in the EU

Schwarz Gruppe, Lidl’s parent, is already the number one in the EU. Total turnover including Kaufland reached €96.9bn (+7.4%) in 2017 (YE Feb 2018). Of this €74.6bn was generated by Lidl.

For comparison, Carrefour 2017 sales stood at €88.2bn (EU and RoW), with the retailer struggling for growth. Aldi sales were not far behind. Tesco with £51bn in global sales 2017/8 meanwhile has slipped down the ranks.

Aldi will easily overtake Carrefour in the next decade. On a global scale eventually Kroger (2017: $122.7bn), the US number two behind Walmart (leaving Costco aside), is in its sights too.

One of the drivers is the relentlessly optimised and highly efficient supply chain, driving high volumes of single SKUs. And this in turn is based increasingly more on a vertical integration strategy.

3. Vertical integration in grocery retailing will continue

The advantages of doing so are numerous. They include complete control over new product developments from timing to production runs. Equally important are security of supply (great for OSA and forecasting), quality control and traceability. Usually a vertical integration strategy is better in terms of costs too, as it cuts out various middle men.

And taking into account a darkening outlook for frictionless global trade streams, a vertical integration strategy looks even more promising.

The discounters (with Mercadona being a prime example) have been at the forefront of this development. Now Tesco has followed suit in the UK with the recent Booker acquisition – and the recently announced partnership with Carrefour also deals with the supply question and lowering costs.

Vertical integration: Booker acquired by Tesco

4.Convenience, fresh and foodservice will outperform

While convenience is booming across the globe, the importance of fresh cannot be understated. High standards in the fresh proposition will attract shoppers and act as the best defence against online. But there are clear cost implications. For one, there is the high cost of replenishment and OSA, as fresh produce sells through quickly. Fresh goods also drive up costs in spoilage and waste.

A winning strategy to attract footfall is foodservice and to create an in-store fusion between foodservice and retail. Eataly is executing this strategy perfectly. This foodservice influence is also reflected in format development. In many inner cities shoppers will find various new food hall concepts and street food pop-up events (such as London Union, or Time Out Markets).

Though Eataly’s latest flagship, a “Disneyland” of food in Bologna provides an exception to the rule, out-of-town for food retail is mature and declining. It is not the format of choice any more.

5.Digitalisation/innovation: focus on logistics, loyalty and in-store

Much of the digitalisation and innovation efforts in retail will centre on logistics, loyalty and in-store experiences. Innovations in logistics (driverless vehicles, drones, robots, and electric) will happen between stores and warehouses. But they will also affect last mile deliveries to the consumer.

Another kind of innovation will focus on loyalty schemes (Amazon Prime) and the move to voice (Alexa, and smart homes). And staying with Amazon the trend towards ‘Lust Walk Out’ technology will give a further impetus to new store formats and developments and create a new in-store experiences (Amazon Go).

Daniel Lucht, director, Research Farm