Boris and the weather fronts…… by Dr. Clive Black

July 4, 2019 1:55 pm
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We all knew it was probably going to be the case; we knew it as soon as the normal summer weather rocked up last August, well July for those north of Watford Gap. The sublime late spring and summer 2018 was wonderful for the British food and beverage sectors, bringing lots of demand of relatively high margin prepared and seasonal food and drink. On top of that Gareth, Harry and Meghan, alphabetically ordered, brought events to put icing on the cake.

What we knew, however, is that late spring and early summer 2019 could be challenging if the weather Gods did not turn up; to be fair to Gareth he took England to third place in Portugal while Michael leads the Group versus Germany and the Netherlands following wonderful wins in Belarus and Estonia (Northern Ireland that is…). Alas, the weather Gods turned against the UK bringing a poor May and a dreadful first two months of June, one with record rainfall, which must have made the international cricketing authorities think, England, why? That recent weather has turned into a particularly challenging comparative hill for the grocery trade into a firm headwind.

Whilst this climactic stuff is all so, it would be wrong to ascribe demonstrable current trading weakness, manifested in sober trading updates from the food retailers, weak secondary data from the market watchers such as Nielsen and early and deep sales from the apparel trade, all to the weather; other factors are at play.

“…in addition to poor weather conditions the shopper is trying to come to terms with a chaotic political process.”

Sadly, three years on from the UK-EU Referendum the UK remains a totally excremental political show. A divided nation is suffering from a lack of capable leadership and so paralysis. That political chaos is wearing upon the British public and keeping their confidence subdued, as measured in terms of the GfK NOP data, which for June dipped back to minus 13 (from minus 9) as the feckless Tories feck about. And the paradox is that the UK has near full employment, a skills shortage and rising living standards, cards that a Chancellor of the Exchequer should be ramming down the throats of the Opposition.

Following a period of stocking up as the first Brexit deadline approached, the momentum in the UK economy has eased. Indeed, could those consumers’ worries about a recession be about to become true, because if Q2 delivers a decline in UK GDP, then a technical recession will have been reached; maybe not such silly shoppers after all; watch Jezza and Maoist McDonnell come to life on this one? So, in addition to poor weather conditions the shopper is trying to come to terms with a chaotic political process, which Morrisons and Sainsbury’s called out in autumn 2018 as one where it appeared the British were behaving as if they were about to lose their jobs.

Whilst this is all challenging enough, there are also yet other arguably more structural underlying changes taking place in the British food market, which serve to adjust the norm, particularly for the conventional supermarket. So, we see an increasing amount of household income going on consumer services rather than goods. For the food segment this is everything from breakfast at Greggs to a student push biker delivering tea from a ropey chippy with a 0/5 hygiene score (something for Deliveroo and Just East to start worrying about as the FSA has at last woken up). The point is that more calories are being prepared and eaten out of the home.

Shoppers are also procuring more goods from convenience stores (CVS), which have grown in effectiveness to challenge many supermarkets, online and through discount operators or limited assortment supermarkets as we now call them as their propositions contain more SKUs incorporating greater chilled and fresh goods. Whilst the death of the superstore has been over blown, foodservice and channel shift represent material ongoing challenges.

There is more change in play, however, than channel shift. Lifestyles are adjusting and well-being is the most powerful force. Consciously and otherwise folks are reducing their consumption of salt, sugar and saturated fat. Indeed, non-meat diets are amongst the fastest growing element of food markets. Such a change tends to have a further theme and that is ‘less’. So, shoppers that are more switched onto well-being, are buying fewer units and a different basket.

“…it appear(s) the British were behaving as if they were about to lose their jobs.”

Sustainability also fits into this mindset as David Attenborough changes the nation’s viewpoints. Sustainability is, of course, much more than plastic. We see shoppers now purchasing loosely packed goods and not buying food to only throw it away. Whilst a sense of proportion is needed, interest in production processes, food integrity and authenticity is growing too. Well-being and sustainability present a volume growth challenge but not necessary a value one; as Dave Lewis, Tesco’s CEO, recently put it; he is more interested now in the quantum rather than only the like-for-like sales volumes of his business. We have said it before and we say it again.., the fewer calories one eats the more expensive they often can be.

What this all means is a tough current trading environment for the UK’s grocers, especially in terms of volumes. Q2/Q3 CY2019  trading statements will reflect the present cocktail of events. Whilst the weather is a real constraint and the politicians are a real pain, understanding the moving parts of a dynamic British food industry is important, as much as the politicians love the limelight even as we loathe them, sadly for the ego driven tribe there is more to life and food markets. In this respect channel shift, digitisation, convenience, discount, well-being and sustainability are an inter-related series of processes that present many constraints and opportunities for food manufacturers.

Cost leadership is a constant theme of business. However, the present grocery sector cocktail make it particularly important. At a time when the banks are not normal either – lending when you don’t need it and taking your eyes out when you do – tight cash management can also be considered a particular virtue of the time. Additionally, whilst each business is different it feels as if we are in the foothills of the internet of things. Whilst one does not need the brains of NASA in the building, appropriate understanding of the fourth industrial revolution feels quite important.

Coriolis is a long standing organisation that focuses upon the food segment and understands the importance of human capital to business plus operational processes and priorities that can contribute to enhanced capability, cost reduction and cash generation. The rapidly evolving British food system may require a helping hand…

 

Dr Clive Black

Advisor to Coriolis Consulting

 

June 2019

News of the end of the engagement is confirmed… By Dr. Clive Black

April 25, 2019 2:07 pm
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The Competition and Markets Authority did not believe that Sainsbury and Asda had become charitable organisations with the sole aim of cutting the grocery shopping bills of the British.

Sacre bleur!

How could the regulator possibly not see that and so supposedly believe that the prime motives behind the proposed merger was to masque the deteriorating trading position of Sainsbury’s Supermarkets and to allow Wal-Mart to exit the UK? In doing so how could that self-same regulator also believe that a duopoly in the British grocery market could in time raise prices? Look at the example of other domestic monopolies…, banks, telecoms, trains and utilities, what’s the problem?

“…..there is probably a sense of relief that the merger is not taking place with the supply base.”

The analysis of the whys and wherefores of this now doomed merger will be debated for some time one senses but what could it mean for the British grocery supply chain?

Well, at first base there is probably a sense of relief that the merger is not taking place with the supply base. Such an emotion will have been felt firstly by international brand owners, who were the prime initial source for synergies from the combination, and then by domestic players, who were thrown into the mix once the provisional findings were released in February and Sainsbury and Asda clamoured to demonstrate £1bn+ of price cuts.

Whilst so, it is important to note that the CMA has acted because it does not believe that a more concentrated industry is in the shoppers’ interest on a five, ten, fifteen year plus view. As such, the trade should be planning for a more competitive British market for longer as a result of this deal being prohibited as bizarre as that may seem; duopolies tend to result in consumers’ being ripped off in the long run.

Post the CMA’s decision all eyes will be on Sainsbury’s future strategy, particularly for a grocery business that has been sustainably losing market share with falling underlying like-for-like sales in 2019 even with modest inflation in the system. We doubt that there will be a revolution at JS and talk of the security of Mike Coupe’s position appears knee-jerk to us. However, a reset and focus of some sorts is necessary as Sainsbury cannot cut itself to growth. Hence, expect some change from JS, particularly around availability, product specification, service and supply chain costs.

As for Asda, well Wal-Mart may be regretting its justification for the Sainsbury merger, not least the preference to exit the UK. Morale at Asda House maybe better now that collusion with Sainsbury has been prohibited and the mood music should be sweeter than is the case at Holborn too. Quite where Wal-Mart goes with Asda though remains to be seen.

“….the CMA has acted because it does not believe that a more concentrated industry is in the shoppers’ interest…”

For choice, we sense a period of quiet reflection and focus is most likely, particularly continuing to work on Asda’s price differential with the German discounters. Beyond that though we will see if private equity fancies Asda or if in time Wal-Mart sees a listing on the stock exchange, an initial public offering, as a route to escape these shores.

The attempted merger process has been a material concern for the supply trade. A little like Brexit, its implications were uncertain, but dealing with it probably meant change. Quite whether or not that change was good or bad was to be determined. Now with Sainsbury-Asda’s prohibition one uncertainty has been removed. However, because of that it probably means a more rather than less competitive industry in the long-run.

In this respect cost leadership will remain to the fore as supermarkets continue to work with their supply chains to reduce costs. The domestic and international grocery supply industry is Coriolis’ forte in working with operating executives to be more productive. Collaboration in this area maybe increasingly timely.

Dr Clive Black

Advisor to Coriolis

April 2019

Three Little Birds…; Taste, Sustainability & Well-being by Dr. Clive Black

March 25, 2019 11:37 am
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The great, sadly late, Bob Marley sang, ‘don’t worry about a thing, ‘cos every little thing is gonna be alright’.

Maybe Prime Minister, Theresa May, and the swamp creatures within her Cabinet alongside the likewise creatures sitting on the soft green leather at the Palace of Westminster feel that this is the way to run a country. At times it is all that many business folks can draw upon as a modus operandi to navigate their way through the UK’s supposed exit from the EU.

Fatigue is an understatement for the nation’s mood on how the political process has panned out. The term ‘national interest’ has been much used but totally abused by every shade of UK politician. And so who knows how things are going to progress but it is an exercise in mis-management of literally the highest degree. Due to that incompetence, the nature of any split and the time that is likely to take looks like it is going to be more costly, extensive and distracting than necessary.

“Fatigue is an understatement for the nation’s mood on how the political process has panned out.”

Whilst venting one’s spleen can have a modest if very temporary palliative effect, the reality is that the food & beverage industry in the UK has to operate within this chaotic environment. Indeed, through the extensive short-shelf life composition of many products, the food industry is absolutely at the forefront of the economic impact of UK-EU relations and, within the wider context, most particularly the positions of the respective industries in Northern Ireland and the Republic of Ireland, where one has to be worried that chaos could prevail. More broadly, food & agriculture are likely to be a central challenge for any trade deals that the UK engages within, if ever.., most notably the USA, where the Irish border, again, will be a key axis.

Beyond all this macro-political and global trade ‘stuff’ it is important not to lose sight of real people, shoppers, consumers… Like me, maybe you, they are sick & tired of ‘Brexit’. Indeed, many have stoically got on with their lives despite the self-centred, attention grabbing and detached operating in the House of Commons. And those shoppers continue to display behaviours that represent considerable opportunities that it is great to see entrepreneurs in the UK seize upon and see-through.

Most particularly is the shoppers’ appetite to pay more attention to what they are consuming. Good taste remains at the forefront of their behaviours, a simple human trait that is a key contributor of added value food – premiumisation amongst proprietary brand (PB) and private label food & beverage is, therefore, a structurally important underlying feature of the market. Good taste rarely is a function of chance though as opposed to the quality of ingredients, processes and the story around a product. Increasingly, therefore, we see growth in the British food market revolving around a joined up story with new lines taking share from legacy brands that have overgrown and at times overstayed their welcome.

Deeper into these market developments is a process that is now and will be more so in the future central to the prospects of shoppers, society and the food industry; well-being. Awareness around the nutritional composition of foodstuffs is rising albeit there is much more for public policy and the industry bodies to do to take matters a good deal further. Such awareness, predicated upon curiosity, interest and need, is influencing behaviours around diet and health. We are not at the start of this journey but it has a long, long way to go, centred upon structural changes to nutrient consumption with less salt, saturated fat and salt and more protein, omega-3, and the constituents of fruit & vegetables, pulses and legumes.

Beyond nutrients there is the level of engineering in food, simple is becoming more virtuous, natural is preferred to synthetic and then there are the issues that are driving vegetarian and veganism, which seems to be more about personal nutrients than animal welfare. Beyond food there is the matter of sustainability; how one man, an atom, changed the structure.., David Attenborough and plastic, doing in one television programme what environmental campaigners have worked for half a century on with lesser impact.

“…we see growth in the British food market revolving around a joined up story with new lines taking share from legacy brands that have overgrown and at times overstayed their welcome.”

So, whilst we sit amongst the stench of what appear to be rotten politicians in these Isles, small minded and what increasingly appear self-centred folks, there remain real decent people out there that need the British food industry to continue to meet their needs, continue to be entrepreneurial and to continue to innovate. A glance at a supermarket shelf shows how good taste, well-being and sustainability to mention but three are structural drivers of change, opportunity and growth that the UK industry is rising too and where the future appears bright.

At Coriolis there is a team of folks that focus upon delivering cost leadership and manufacturing excellence that enable the concepts, ideas and products developed by British food entrepreneurs to also be generators of free cash flow and wealth.

As the 29th March 2019 approaches here is to a competitive, innovative and entrepreneurial British food & drink industry whether our politicians are with or without us.

 

Dr Clive Black

Advisor

Coriolis Consulting

March 2019

Political fog – Will it be alright on the night? by Dr. Clive Black

February 19, 2019 4:21 pm
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The late Denis Norden made his name with his phrase ‘it’ll be alright on the night’. Each morning for some weeks and months now many of us wake in the knowledge that March 29th 2019 is one day closer, each evening we go to bed thinking.., but ‘it’ll be alright on the night’.

Whatever colour political rosette one wears upon the lapel in these times it is simply an unacceptable political situation. The uncertainty and corresponding frustration of the business community surrounding the nature and extent of the UK’s economic relationship with the EU and the wider world in fact is now palpable. I spoke at the Oxford Farming Conference in early January about the Palace of Westminster being a tank where the fish are political lunatics. Six weeks on one is tempted to say that such a statement is a bit harsh on goldfish.

It is remarkable that five or six weeks away from the UK’s exit from the EU, at the time of writing, that not a single person in these Isles knows how matters are going to pan out in our wider economic relations. For businesses this is a real concern, particularly for those that are importing components or selling goods to the EU. One can plan for certain things, as many firms have done so with stockbuilding, but in fresh and short-shelf life food products in particular  the capability and capacity to cost effectively plan in the face of such major uncertainties is nay impossible.

“It is remarkable that five or six weeks away from the UK’s exit from the EU……not a single person knows how matters are going to pan out in our wider economic relations”

Food businesses do not know whether or not tariffs and customs controls will be applied from April Fool’s Day. Ministers’ go from pillar to post on tariffs whilst the movement of goods across our international shores is a bit of a minefield to say the least. Logistics firms sit at the moment with mind-boggling confusion about how their vehicles may, or may not, move across the Irish and North Seas, never mind the English Channel.

A hungry nation is a dangerous thing and the political powers that be know that. Equally though supermarket bosses, food manufacturers, farmers and logistics providers sit and watch with horror as to how an orderly food market will progress in April if there is a ‘no deal’ scenario. The scope for material food price inflation and even potential shortages of certain foodstuffs, noting that I do not expect empty shelves to be the normal, largely because of the ‘it’ll be alright on the night ‘ syndrome, cannot be ruled out as can the growing likelihood that the 29th March maybe abandoned as an exit date, with a can kicked down the road.

Against this backdrop businesses may be keeping an  especially close eye on their costs and cash flows. Small food companies in particular may need the support of a banking system that failed them badly in the last financial crisis should supply hiatus’ emerge, from the funds to build up stocks to the need to carry higher costs without necessarily receiving payment and recovery first.

In this respect the sun will shine on April’s Fool’s Day and thereafter but an extra level of tactical nouse and agility could also be the order of the day for food companies in particular. Talking to suppliers and customers may also be a virtue so that over-planning and incurring unnecessary costs, rests alongside avoiding any obvious hurdles and barriers to trade.

“Small food companies in particular may need the support of a banking system that failed them badly in the last financial crisis”

I wish all businesses well in this chronically ridiculous situation when all of the small-minded Members of Parliament swimming in the Palace of Westminster pool should hold their collective heads in shame. The ‘National Interest’ is an anathema to them all from the incompetent Prime Minister to the shameful Leader of the Opposition, the revisionist retainers to the rabid Brexiteers, whether Ulster, Welsh, Scottish or English.

Quite what the future holds for this ‘nation’ remains to be seen. The 29th March is a day that will come and go, thereafter one senses that the political class will remain a source of instability and uncertainty for the business community; therefore a total failure of government and parliament.

Accordingly, at the end of the day, let’s hope ‘it’ll be alright on the night’ and that more stable and brighter times can be ahead. To this end I wish you all well.

Dr Clive Black

Advisor to Coriolis Consulting

February 2019

Online grocery is not easy…By Dr. Clive Black

November 22, 2018 9:41 am
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Time creeps by. It is hard to believe that a somewhat younger Tim Mason, then a Director of Marketing at Tesco, launched Tesco.com, a new online grocery proposition, twenty-one years ago! Since then the digital world has been a veritable revolution, now penetrating all walks of like and in increasingly connected ways through the Internet of Things.

The UK, despite the difficulty in gaining a working mobile telephone signal in half the country, is globally advanced in the digital consumer field; the said Mr Mason is now CEO of Eagle Eye, a global leader in digital consumer loyalty programmes where one Sir Terry Leahy is a non-executive director. More broadly, that advanced international status of the UK as a digital consumer economy is exemplified in the BRC-KPMG Retail Sales Monitor for October 2018 where over 27% of all non-food retail orders were online; that is approaching one in three items.

The UK is also advanced when it comes to e-grocery and in Ocado it has what is in effect an online  fulfilment specialist, as opposed to a proprietary grocer, that can deliver pomegranates robotically picked to the moon. More broadly we also have one of the highest online grocery participation rates on the planet, sitting at around 7%.

What is perhaps noteworthy about this statistic is that whilst 7% of a c£190bn market is a considerable value being shopped online with a corresponding large volume of units being delivered in white vans across these Isles, it also tells us that c93% of groceries bought in supermarkets in the UK are done so by shoppers in stores! So, after a generation of online activity, shops remains hugely relevant to the food industry and, it should be noted, that the vast majority (90%+) of online grocery orders are picked from supermarkets.

“The UK has one of the highest online grocery participation rates on the planet, sitting at around 7%. “

The reason for what may be deemed a rather pedestrian rate of penetration progress by the online channel in food largely is economic. Online grocery is fiendishly difficult to do on a profitable basis. Ocado has been twice rescued since its IPO and remains barely profitable where it matters at the pre and post tax level. Furthermore, the supermarkets, faced with the disruption of the limited assortment discounters (LADs) and wider profit collapse have had to pare back their online ambitions to reduce the profit outflows.

Accordingly, we see much more pedestrian growth rates in the UK e-grocery channel as 2018 comes to an end, circa 7-8%, as the supermarkets ease off on free delivery slots and coupons and vouchers to capture the online shoppers’ custom. The economic reality is that shoppers invest a lot of resource in time when they walk the aisles, fill their trolleys and baskets, stand at the check-out and take their bags home. To replicate that is a labour intensive and costly exercise, one that few models to date mean that a satisfactory economic return is achieved. Indeed, returning to Ocado, the challenge for centralised fulfilment of multi-temperature goods to a dispersed customer base is particularly difficult to make an attractive return on invested capital.

“Online grocery is fiendishly difficult to do on a profitable basis.”

The challenges of online shopping, most notably the rather boring exercise of buying on a screen.., has been reflected upon by Amazon, which has subsequently acquired high-end Whole Food Markets for c.US$14bn and commenced the trial of the ‘Go’ format; a cash-less store. Such investment suggests to us that Amazon understands the central role that stores will play in the grocery market, noting that Fresh in the USA has not been a disruptive force yet, as Ocado has not in these islands.

What this means is the future of supermarkets appears quite secure and the art of good shopkeeping remains as important today as it ever did. Online will continue to gain market share but at rather more pedestrian step than many technophiles predicted/predict, noting the ongoing role of stores in e-fulfilment too As such centralised fulfilment can be expected to remain at the periphery of activity and, this being so, we would be surprised to see Amazon acquire a major British grocery in time, which is likely to put the cat among the pigeons; for the LADs mainstream online e-grocery appears a challenge given the cost focus of their business models.

Tim Mason and Tesco were so far ahead of the curve in the late 1990s and whilst the supermarket business did reach its zenith a decade later, it is worthwhile noting that it has a c40% share of the UK online grocery market as the second decade of the twentieth century comes to an end. Understanding not just the direction of travel but the pace of the online journey is important when considering food markets.

Dr Clive Black

Advisor to Coriolis Consulting

November 2018