When 4 became 11… But the Big Four retailers don’t seem to be panicking just yet

March 16, 2016 3:19 pm
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Just a couple of years ago, newspapers were giving frequent coverage to the market share of the Big 4 Retailers. With the post-recession shopping landscape having changed so radically, journalists were asking whether the Big 4 would start moving into a period of inevitable decline and failure. While these questions inevitably had a veneer of journalistic hyperbole surrounding them and a likely over inflation of the findings of professional bodies, the continued growth of Discount Retailers can’t be pushed aside as inconsequential. The increase in other retailers’ market share at the expense of Tesco and Morrison’s can’t be identified as a temporary blip.

The Big 4 retailers accepted the rise of discounters as a result of the recession, waiting for the recovery to regain their market share as consumers went back to spending more on the “quality and brands” that had enabled them to dominate the UK scene. Everybody understood that necessity had driven many towards spending less, surely they wouldn’t keep doing so when they had the choice?

Discounters continued to gain market share, with the IGD forecasting that the discount sector would almost double with sales growing from £9.5bn to £18.6bn between April 2013 and April 2018. Whilst this is due in part to an unprecedented number of new stores opening, the discounters are also taking customer segments which were previously key markets for retailers such as Tesco. Considering the AB socio economic demographic, the discount retailer’s customer base of this population has risen from 12.9pc in 2013 to 18.6pc by mid-2014.

To put this all into context, these tales of doom and gloom do not translate into the inevitable demise of the Big 4, and even with the growth of the Discounters they still possess 71.6% of market share. But that doesn’t mean that the large retailers can afford to be complacent, especially with analysts now talking about the loss of the “Big 4” title, to be replaced by the “Big 7” or even the “Big 11”!

So the question remains, what have these large retailers done so far, and what can they do in future to maintain their market share in the face of a rapidly changing and cut-throat marketplace?

  • Convenience stores – one reaction has been the rapid growth of Convenience stores over the “Big Box” (out of town stores that larger retailers have become renowned for). Often placed in the vicinity of their Discount competitors, these stores help provide an inroad for certain brands in areas where they are otherwise underrepresented. The downside is that they draw consumers away from the “Big Box” stores, reducing the payoff for these high cost, high investment assets and encouraging the trend for “top up shopping” amongst consumers.
  • Matching consumers’ changing shopping habits – Industry bods have charted a clear move by consumers away from weekly shops, further undermining the role of the larger stores. Instead, many consumers are favouring a bulk online order for key staples and supplement this with visits to convenience stores during the week for fresh goods. A reaction would be to reduce the floor space of the “Big Box” stores and increase the number and concentration of the Convenience Stores. Whilst this seems like a quick decision, the expansion of this model would only help to fuel this trend, thus damaging the existing model of these large out of town stores even further.
  • Online Deliveries – This is an area most retailers have been exploiting for quite a while, targeting time poor consumers looking to avoid a trip to the supermarket. However, these can carry a prohibitive cost, especially on the smaller orders. What will be most interesting to chart is the impact of Amazon online grocery shopping, both on the market as a whole, and on how they continue to adjust and develop the process. Amazon are particularly well-equipped to understand their consumer data and have repeatedly demonstrated their flexibility to act on consumer trends. This cannot necessarily be said of the Big 4, who have so far failed to take full advantage of the information provided to them by their loyalty cards.
  • Pick up points – One solution to the better utilisation of the larger stores has been to convert an area to drive-through pick up points for online shopping. Several commentators are seeing this as the future of shopping, although it is acknowledged that it carries risks to margins if not done correctly. Expansions on this idea may be to imitate or develop the South Korean concept of virtual shelves where commuters scan bar codes on interactive bill boards at rail stations and have the items delivered to them by the time they arrive home. This is being trialled at the moment, and it will be intriguing to see how cost-effective the method is and to what degree busy consumers will accept it.
  • Emphasis on quality and ethics – One area that people would naturally assume was well within the field of the Big 4 against their discount opposition would be on issues around quality and ethics, particularly within their supply chains. Studies show that these are priorities for a number of consumers, with 83% opting for organic produce wherever possible, and 13% actively looking for organic produce in all of their shopping. But again, this is something that the Big 4 would need to do the groundwork on. After the horsemeat scandal, questionable labour policies in Big 4 supply chains, and with Aldi and Lidl’s ranking in the middle of the table, there is some way to go before the Big 4 can exploit this reputation.
  • Cutting prices – All commentators and industry bodies see a race to the bottom as being bad for consumers and for the industry as a whole. With margins pinched already, stalls in investment and drops in stock price, rapid price reduction will only harm the industry and individual retailers, whilst preserving the strengths of Aldi & Lidl. On top of this, consumers are more than wary of Big 4 price deals that are there one day but not the next.
  • Match gaps in rivals’ stock – One option might be to exploit the budget retailers’ stock gaps, allowing consumers to purchase their main items there, whilst topping up at the Big 4 stores for fresh, higher quality or more varied goods. This supports the need for convenience stores near discount rivals’ stores, and so matches investment that has already taken place.

These are just a few options out of many, and each of them could be expanded and debated much further than has been done so here.

Whilst the move to encompass changing consumer habits shows a willingness to adapt, the Big 4 are still too slow. Be this due to internal bureaucracies, slow decision-making processes or a failure to fully appreciate the situation that they are in, the Big 4’s reaction has been stilted thus far.

In spite of this, many in the Big 4 would point out that they still dominate the market, and are structurally in a strong place. Pointing towards increasing rental investment and with many of the “Big Box” stores extending their leases, they are clearly demonstrating their confidence in the current model. But with a reduction to 71.6% market share at the end of 2015 (76.7% in 2012) and Discount retailers only set to grow, the Big 4 should look to make quick changes now if they want to continue to dominate the market place, before they become just another number in the Big 11.

 

Ref

http://www.britishbrandsgroup.org.uk/upload/File/Grocery%20needs%20summary%2097.pdf

http://www.foodmanufacture.co.uk/Business-News/Big-four-retailers-should-scale-down

http://www.retailthinktank.co.uk/whitepaper/the-future-of-the-grocery-sector-in-the-uk/

http://pearsonblog.campaignserver.co.uk/?tag=supermarkets

http://www.theguardian.com/business/2014/oct/05/big-questions-big-four-supermarkets

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11585366/The-four-reasons-why-supermarkets-are-losing-money.html

http://www.retailthinktank.co.uk/whitepaper/the-future-of-the-grocery-sector-in-the-uk/

http://www.ethicalconsumer.org/buyersguides/food/supermarkets.aspx

http://www.statista.com/statistics/279900/grocery-market-share-in-the-united-kingdom-uk/

 

Written by Alex Fitzgerald, Coriolis Ltd