2017 And All That

As is customary at this time of year, we have a selection of direly pessimistic and overly optimistic predictions for the coming 12 months. Well, I'd hate to exclude myself from all this fun, so here are what I believe will be the big themes for 2017.

Either way, it's going to be an exciting and challenging year in retail. See you on the other side!

The Shrinking Spend
The economy as a whole may have been growing, albeit slowly, for a while now, but the reality on the ground does not reflect that. Rents and mortgages take up at least 40% of expendable income while a figure published this week pointed to rail fares taking up 14% of income for those who commute. 

These figures will continue to grow, and should there be even a small interest rate hike, the amount available for households to spend in shops will decline sharply.

Retailers will also need to combat upward cost pressures caused by continued uncertainty over the UK's exit from Europe, both in terms of their direct imports and the costs of their suppliers.

Less spending from shoppers and higher prices will hurt volumes in the long run, which of course will hurt manufacturers who depend on selling volume to keep costs down.

So, price will continue to be important so expect more price wars and pack size reductions. It will be interesting to see how the single price retailers (Poundland, Poundworld, etc) can cope with these pressures. 

People In Retail
After many years of depending on state subsidized labour, retail is having to deal with increases in the minimum wage (although it is still well short of a Living Wage) and a growing backlash against under-employment through zero hours contracts. Last year saw increased media scrutiny into conditions at warehouses and I'd expect this to extend beyond the rag-trade this year. During my time in grocery retail, Distribution Centres were tough places to work but the ones I saw weren't as bad as those exposed at Sports Direct last year. However, the workplace has changed a lot over the last 10 years and an undercover exposé could be damaging if similar bad practices are discovered.

The debate on automation will grow too. Amazon's "Go" concept has got a lot of retail analysts excited, but we need to be careful about automation. Some stores I visited in the run up to Christmas were struggling to cope where they had over-invested in self-scan tills at the expense of manned tills which are still the most efficient way of getting shoppers processed. And while retailers may get excited at the reduced manpower costs of automation throughout the supply chain and store, some caution needs to be considered. From a service perspective, people like buying from people (on the whole!) and more importantly, staff are often your most loyal shoppers. With around 2.8 million people in the UK employed in retail, A 10% cut in workforce could wipe £1.2bn of sales out, so it's not something to be taken lightly.

Fight or Flight For Wal-Mart
As I predicted, Asda finally lost the 2nd spot in Grocery to Sainsburys last year despite huge investment in price from their American parent group. A new CEO might make a difference, but years of poor or "bought" performance from Asda under Andy Clarke will take a big effort to rectify.

In the UK, Asda faces a multitude of problems and will need to get smarter to deal with them. Too often, they depend on their one marketing lever - Price - and this is clearly broken after the rise of the hard discounters. 

Wal-Mart's aspiration for global simplicity - seen by the Wal-Martisation of the Asda logo - will need to be adapted if they are to succeed in the UK. They have lost their top end to JS and Tesco, their core to the Hard Discounters, and a resurgent Morrisons is causing trouble in their heartlands. They can't rely on George clothing to bail them out as much now with Primark so dominant. I expect their former CEO, Andy Bond, is scenting blood as he merges Pep & Co into Poundland too. 

So, what will Wal-Mart do? They've been able to overlook the declining market share over the last few years as Asda has delivered increasing profits, but the loss of 2nd spot, declines in volumes and the tougher GSCOP rules means they can't throw their weight around with suppliers so much and the cash cow might start to run dry.

Another Convenience Revolution
It's been a vibrant channel for a few years now, but Co-op's new format and the One Stop business should make the sector raise its standards even higher.

Nisa and Spar have created some great looking stores in response to the JS Local/ Tesco Express challenge, but the standards of execution in Co-op and One Stop are something else that even JS and Tesco will need to take notice of (and yes, I know Tesco own One Stop!!!).

I would hope a focus on availability, core ranges and shopper-led space management become the new agenda for independents

Bitter Pills For Pharmacies
I will be doing a full blog on this sector soon, but it's worthy of note here as Pharmacy retail faces a big challenge this year with funding cuts from the NHS and threats to reduce the number of licenses.

It is a largely under-developed sector for retail - many pharmacists seem to think retail is below them - but with many pharmacies dependent on over 90% of their turnover from the NHS services, they will need to turn to retail to fill these gaps.

It is a sector ripe for consolidation, with less than half of the 14,000 community pharmacy licenses in the hands of the large multiples. However, until the licensing plans of the government become clearer, I would not expect any major acquisitions from Boots, Lloyds or Well.

Unileverage In The Great Grocery Game

For as long as I can remember, there have been big spats between manufacturers and grocers over prices. At the end of the day, it's the fundamentals of the game. Never mind customers, grocery is about buying a lower price than the people making the products want to sell it. Every hour of every day, there will be a foul-mouthed shouty row between a buyer and a National Account Manager (NAM) about a 1p disagreement.

Today, we've seen one of those rows bubble over into the public domain with Tesco admitting to availability issues on Unilever products, with Marmite being chosen as the media-friendly brand to lead the stories. A spat between Tesco and Unilever is a big deal, but we've been here before with Sainsbury's taking Pepsi off the shelves, Asda removing I Can't Believe It's Not Butter and even Stella Artois briefly fading from sight in Tesco many years ago. Price is always the battleground, but it's not always the grocer who's the baddie in the argument.

Whilst our grocers are big businesses, they still arent't at the top of the food chain (pun intended!). The multinationals behind our favourite brands outstrip entire countries in their turnover and, often, if you upset one business unit, you upset them all. Much of the dust-gathering NPD on our shelves is there because a Unilever, PepsiCo or P&G has hovered their finger over stopping or disrupting supply of their established brands.

The way our shelves are re-stocked also gives the manufacturers a lot of power. Retailers set inventory targets around the ideas of "just in time" replenishment with no stock held out the back. Our data-driven world has brought us ever closer to the dream scenario where stock arrives at a distribution centre, goes straight onto a wagon to the stores where it goes straight into a waiting space on the shelf without the SKU ever going off sale.

The whole concept is impossible of course - as with much data-led analysis, it assumes a large group of individuals will behave in exacatly the same way, at exactly the same time and day every week. The gaps already appearing in Tesco today following Unilever putting them onto "stop" are testament to that.

Inevitably, the decimation of the value of sterling following the Brexit announcements by the government will be cited as a reason for this dispute. It follows on a long line of reasons - everything from increases in commodity prices to the price of oil - but the heart of it is protection of margin. Retailers are profitable, but their margins are thin. Food in particular - the engineroom that powers our grocers' turnover - is very low margin, hence the need to pump up the share of sales coming from high margin general merchandise and clothing. When you consider that element, the JS purchase of Argos seems like a masterstroke.

But the margins at manufacturers are very high - often NPD won't be launched without at least 25%-30% margin for the manufacturer. In the modern retailing world, many are feeling the pain and it's time for manufacturers to step up to the plate. They will argue that they are taking the risks, developing the new products and building the brands so they need the extra margin. But, when you consider the growth of private label, largely through the discounters, the era of branded food goods might be entering its final days. Innovation these days seems to be drying-up - a white chocolate version of a milk chocolate snack is not innovation, neither is a bacon flavoured popcorn snack. And consumers are increasingly happy with the edited choice that an Aldi or Lidl gives them. So, manufacturers need to take a long, hard look at themselves before expecting retailers - or shoppers - to protect their margins.

Of course, this skirmish will sort itself out. Some of the off-balance ways of meeting halfway are now closed following various financial scandals, but you can be sure that Tesco won't want empty shelves and neither will Unilever want to lose that many distribution points. And some poor Category Manager is going to get a kicking at their next range review!

Asda Keep On Spinning As The Ship Sinks

Regular readers, if there's any left since I stopped blogging so frequently, will know I've long been critical of Andy Clarke's leadership of Asda.

As he is forced to admit that their performance is below par, even by the low standards being set by the Big 4 these days, all the years of spinning to try and claim that Asda is a viable strong and growing business are coming to an end. Surely?

The alarm bells really started ringing when the over-active PR guys at the Green Pleasure Palace started highlighting double digit profit growth which seemed at odds with their, at best, stagnating market share being shown on Kantar data. As Tesco have spectacularly shown this year, chasing only the bottom line is a dangerous and inevitability futile task in grocery retailing. That's been true before the discounters arrived on these shores as a handy scapegoat. Although I can't help but wonder how much of that profit growth was from the decision to ditch their famous "end with a 7" pricing policy and decide to end with an "8" - the number once described by Darren Blackhurst as "fat and unappealing".

Unlike Tesco, Asda neither has the reach in terms of shops nor the same level of general goodwill that Tesco used to enjoy from the public. Despite the pictures of smiling, happy, and sometimes dancing, colleagues pumped out around Asda House in a way that North Korean State TV would be proud of, the reality in stores is generally the opposite. Undertained, poorly motivated and badly led colleagues usually lead to at least one piece of bad service on every visit. I can't think of any other retailer where I'd see a department manager effing and blinding to one of his team on the shopfloor that he didn't have enough department hours to fill the shelves that week. 

Andy Clarke's most famous spin is that Asda "don't do gimmicks". Well, unless you count putting up a 97p bucket to £1 to get it onto a promotion end as they did in 2008 because it's a "round pound". Or Rollbacks which Asda insinuates to its customers are permanent but are generally 12 week promotions. Or the biggest gimmick of all, "Asda Price Guarantee".

Again, my disdain for APG is well documented - not inclusive (not everyone has printers at home), not instant (next day) and, largely, not actually true. They are often cheaper, usually through clever basket manipulation about what counts as a fair comparison or not. Even then, rarely 10%, so APG is basically a targetted coupon given to every customer who spends enough money and has a printer. It keeps some punters coming back, so fair play then.

APG reminds me of the Grocer33 mentality of the High Noon meeting which used to happen (I won't say it still does as it's now 6 years since I escaped from Asda, but given Clarke's obsession with Asda culture, I doubt it has changed!). Senior managers would be castigated on any week that the G33 had gone to a competitor. All long-term pricing strategies were out of the window by mid-afternoon to get the pricing in line. If only they had that level of dedication to real customers!

Clarke is tending to blame discounters for the performance, back in November describing them as a "shockwave" in November last year. Must have been a shock to a man who was COO of a business that tried an anti-discounter format back in 2006 (a Mr. A. Clarke, possibly a relation).

Asda - who in 2008 were saying "this is our time" - have a fundamental problem which Andy Clarke has spectacularly failed to tackle; what are they here for? They gave up attempting to be a true mass market retailer when they dumbed down their ground breaking 3 for £10 wine offers and embarked on suicidal less-is-more ranging strategies. Asda is only about price and people now tend to believe the less dogmatic and thereby seemingly more honest pricing policies of Aldi and Lidl. 

Their stores have ceased to be relevant - there's been some great work done on George and, to a lesser extend, in General Merchandise, but their food halls are still deeply unappealing places which really don't showcase the product well. It is a pity as they do still have great bakeries (second only to Morrisons in my opinion) and their counter offers continue to be strong. But why would you go to a larger Asda store to see a shrunken range merchandised not too disimilarly to an Aldi when you could go to an Aldi? Oh, and Aldi staff seem to be way more committed to their cause than Asda do.

Asda need to watch out - Sainsburys continue to close in on the number two spot, while Morrisons aren't likely to carry on as a lame duck once Potts and Blackhurst get going in Bradford. Meanwhile Aldi and Lidl are bullish and creating more space for General Merchandsise which further erodes the need for Asda.

Clarke better hope and pray that George don't have a bad season in the coming year - that could finally end his lacklustre tenure.

When Your World Is Shrinking, Grab What You Can

The reaction to the latest Kantar market share data says quite a lot about of the mood of the industry at the moment.

A couple of months back, JS beating Asda into second place got brushed under the carpet, but this week’s reaction to Waitrose being overtaken by Aldi was everywhere.

The latest Kantar market share data has the big 4 still controlling 72.8% of the grocery till roll, down from 77.9% in December 2009, and trending slowly downwards.

This is still a huge chunk of the market, yet they seem to have stopped trying to really compete with each other and are instead chasing the bottom 10% of the market. I’m increasingly of the belief this is absolutely mad and they are, in effect, signing their own death warrants.

In my old job as a supplier, a buyer from one of the big 4 had the inevitable “how can my category beat the discounters?” discussion with me. He caught me in a fairly relaxed and candid mood. “Easy,” I said, “reduce your store space by 70%, thin out the range, remove all but a handful of branded SKUs and focus on Private Label”. It was easy to say this, even though I represented a branded food manufacturer, as I knew their entire business model was based around funding from branded manufacturers. Of course, the sledgehammer of customer-led ranging that is “SKU Rationalisation” is well advanced, so it looks like they are intent on destroying themselves from within.

I still maintain that we are largely a nation of snobs when buying our groceries. We like choice, we like nicely presented shops. The mults are trying to replicate the opposite in an effort to chase down a small part of the market. Even if Aldi, Lidl and Netto pick up 20% of the UK market – why wouldn’t you just try and ensure that you grow your share of what’s left? Surely it’s easier than taking them on at something they do really well? This is where we come back to Asda’s failure to capitalise on market conditions. They are known for price – someone should let them know that we GET that. Price gets you in, but the trick is to offer people the chance to trade up.

This is what Tesco used to be the masters at and Asda have the mechanics to do – Extra Special is a great premium brand, the concept behind Global Buying was solid – but they then ruin by trying to pretend they’re a discounter. This isn’t the first time they’ve done this – they attracted in lots of more affluent shoppers with their 3 for £10 permanent wine deal in the 2000’s, then annoyed them by taking the SKU count down by 15%!

But will someone break out of this herd mentality? Even if it is to try and take on the other growth that’s happening in the grocery market at the top end of the market! Waitrose are having the easiest ride of all. They aren’t a great supermarket with a fairly dull shopping experience and poor mid-market choices in range. Yet somehow, they’re being left alone to grow unchecked. OK, there are some targeted “upmarket” ranges being adopted by retailers with a hold on demographics, but it’s brand positioning that pulls people in that demographic in, not stocking five different types of balsamic vinegar. And if the big 4 are too obsessed with screaming about price and value, that’s not going to work.

Just targeting your range at the bottom part of the market is a self-fulfilling prophecy. It’s the kind of mentality that led Asda to only offer a Smart Price option for some commodities in their small stores some years ago. If you’re not going to be a pure discounter, you have to offer customers the opportunity to spend more and trade up. We’re in danger of forgetting that.

The big four need to accept that their pie is smaller than it used to – to stop it getting even smaller, they need to start getting back to taking lumps out of each rather than obsessing about an enemy they can’t do anything about.

"Sod This, We Give Up" Announce Tesco

Today's profit warning wasn't really that surprising and an initial haemoraghing of the Tesco share price was probably exaggerated by quite a jumpy market. However, the accompanying announcement about a scaling back of IT and store refresh projects is a worrying development for the long term future of Tesco and could signal the end of true mass market grocery retailing in the UK.

The store refresh programme was always ambitious and, as I've pointed out a few times, it was hard to see how a load of wood cladding and wicker baskets could improve the aesthetics and sales of much of their older estate. An accusation that could be levelled at Tesco was that they were focusing too much on the easier stores which weren't in that bad nick to start with or were more likely to deliver some tasty results for the city to munch on and keep the shareholders off their back for at least one more quarter.

Nowhere has this been more stark than their approach to their High Street/ City Centre Metro format. Here they have turned out some spectacular, cutting edge stores - but it's easy to do that in locations like Tooley Street, Canary Wharf and, most recently, Hammersmith. But these kind of stores do no make up the vast bulk of the Metro estate - how would these initiatives work in Stretford, Halifax and Margate? The ambitious programme that established the Metro format between 1999 and 2001 refitted all but a couple of stores, bringing a high standard of store onto over 170 High Streets. There has been no indication of any plan to repeat that feat despite the fact that it is these stores who are in the front line in the battle against discounters and pound shops.

But why would a savvy retailer like Tesco ignore huge swathes of its estate? The answer lies probably in the business culture that we now have which is focused on delivering healthy quarterly numbers to appease the city. The fact that grocery has been, and always will be, a business that benefits from long term planning and thinking, is now forgotten. Arguably, the lack of close scrutiny on Asda has helped them get away with doing very little and reaping some benefits now as they've also not been pressured into making short term decisions to grab a quick buck.

If cost cutting is a necessity, they should perhaps look seriously at a nuclear option involving store closures. Running a store is an expensive business and as a result of their massive expansion, the return on space is getting painfully low. An Extra taking in a £1m/week costs not much more to run than an Extra taking £400k/week. And you don't need 5 extras in 3 mile radius (as we have in East Manchester now). With a huge estate, the support services are clearly stretched. It also makes their dependence of making decisions using DunnHumby less viable as the data is based on lower shopper counts when you get to the granularity they now work at.

The business overall needs to get simple again - they owned that word once. They changed the aspiration for mass market grocery. It was more than "all things to all men", it was offering the same choice to all. Now, the obsession with understanding customers to an incredibly detailed level means that they're taking that choice away from many. The idea of some products only being available to customers in a specific demographic is bizarre and not why people used to love them.

The great shame is that no one wants to replace that role in the market - most are engaged in a race to the bottom, with a couple (plus the "Local" movement) looking to cater to only those who can afford choice and service.

Mr Lewis - please prove me wrong....

Keep Your Enemies Close…

Once I’d stopped laughing at Asda after Sainsbury’s announcing a joint venture with Netto a few weeks back, I started to applaud the move.

Amid the mass hysteria in the traditional mults over the relentless march of the discounters, I’ve been trying to look from a more pragmatic angle. Though clearly the economy and the continued squeeze on shopper’s spending power are driving people to the likes of Aldi and Lidl, the fact that they have become so much more accessible following a fast expansion in sites is also a big driver of their success.

A lot of trends have emerged which point to the increase in the number of Top Up missions. It makes sense really – lots more big shops through the internet coupled with an unprecedented number of grocery stores of all sizes on your doorstep.

In the context of my current job, I was amazed that none of the retailers I work with were considering proximity to the discounters as a way of understanding where the money was going. But when you look at it, even at a category level, there are some very interesting correlations which tie in nicely with the observations about shopper behavior.

For the analysis, I grouped together stores by format and whether or not they had a Lidl or Aldi in the same Postcode Sector as them. The results were fairly interesting, and in some cases, not that unexpected. Smaller stores in poorer areas were bearing the brunt of the impact and significantly overindexing in their share of sales decline. But what was interesting was that larger stores seemed in many cases to be benefitting from having a discounter neighbour. Perversely, it appears that the increased demand for discounters drives footfall to the larger mults who then get a benefit from a complimentary shop.

With this in mind, the announcement this week that the first two new-generation Netto stores will be using dead space in existing Sainsbury’s hypermarkets makes absolute sense. Having a double-reason to shop at the same location is a great idea – it enables “savvy shopping” while minimizing fuel costs. It will also be interesting to see how the Netto brand works in decent locations. At the heart of why I believe the Asda acquisition of Netto was so fundamentally flawed was the fact that the old Netto property portfolio had a dire location strategy. If you are a smaller store, you need easy access rather than being on a retail park, unless that retail park has a great anchor store that will draw in footfall.

That doesn't mean there isn't some risk to the core business - clearly a Netto on the doorstep will take some sales away from the host Sainsburys store, but this will tend to be across lower margin high volume grocery products. With the potential to attract non-Sainsburys shoppers to the site and therefore into the Sainsburys for less mass market products, as well as clothing and general merchandise, the upside should more than account for the downside.

We’ve seen a number of attempts by the old guard to counter Aldi and Lidl – be it competing with tertiary brands (Tesco), pulling the price lever so hard it breaks (Asda) or opening up an upmarket post-industrial format store (M Discount). None of these has really worked, so taking the discounters on at their own game but without damaging your core brand, could yet join them on the scrapheap. But, for some reason, my gut feel is that this is a runner.

And it gives me yet another reason to laugh at Andy Clarke.

I'm Spartacus! or Dalton Goes Large

Now we’re talking – a proper ding-dong of a price war is underway. For us veterans of the late 1990’s price wars, it’s felt like a cold war over the last couple of years, with the real battles being played out by lawyers arguing about the wording of the price match schemes which have been used instead of actual price cuts.

So far this year, we’ve had Price Drop 2 from Tesco which has felt a bit of a damp squib unless you enjoy seeing beautifully decorated and merchandised traditional market stalls in front of gapy actual produce departments. Co-op have weighed in with a well-designed, but poorly executed, campaign under the “Fair & Square” banner.  Asda of course, are always 10% cheaper anyway, which is why I got £10 back off an £80 shop through Asda Price Guarantee recently.

But this week, Morrisons raised the stakes with a wide-ranging selection of cuts across the store. But “I’m Cheaper” is way more and could potentially be a game-changer for the trade, if not for Morrisons.

First of all, there’s the execution. They’ve been working hard towards maximizing impact in stores with the decluttering that has been happening recently. With less clipstrips and the banishing of the dreaded wire bins and manufacturers shippers, any big launch would be given a chance to be seen. And be seen it is – the design is uncharacteristically simple and is consistent across all categories and all forms of POS. But more importantly, it’s landed in one big hit with no signs of it being implemented. I can’t remember the last time I went into a store at 9am of a big launch and saw everything up with none of the store staff walking around with various bits of cardboard and fixings while scratching their heads. Security covers, barkers, wobblers, displays and even hanging boards (and there’s one in virtually every aisle) were all in place. Even Tesco didn’t get this impact when they launched their “Love Every Mouthful” and, although there’s been better execution of “Down and Staying Down”, its scope is limited to the aforementioned market stalls. “I’m Cheaper” touches every single corner of the store. Wow.

But there’s more – can you remember the last time a retailer was so shopper-focused with their message? Usually price cuts are announced with big numbers hoping to communicate the scale. However, to the shopper they sound more like Dr. Evil in the Austin Powers films saying “a beeelion pounds”. Morrisons are talking about the number of products they’ve the cut the price on – “over 1000”. That’s a number shoppers can understand– it’s big, but not so big that they can’t get their head round it.  £100million of price cuts might not seem much when they hear about profits of £1bn plus, but 1000 products seems big, especially as most probably don’t realize that there’s likely to be well over 15,000 products in the average superstore.

So far, so good then. But what this exposes is an underlying weakness with Morrisons in terms of their ability to build a modern dynamic retailer. When they do stuff with scale – a price launch, new channels, store formats, etc – they are market-leading in terms of ideas and execution. But they continually fall down on the small category level projects and even relatively normal work such as range reviews. At this level, from a suppliers perspective at least, there feels like there’s a lack of real leadership and this lets the cultural in-fighting between the pre and post Ken-era people in head office take over. Unfortunately, for all the glamour of the big stuff, it’s selling beans and doing it better than the other grocers that makes the difference. You see evidence of this in the M Local and M Discount formats – great concepts, beautiful shops full of innovative details. But the ranging is terrible – speak to the buying teams and most deny any knowledge of it, and even less interesting in trying to sort it out.

I have a real soft spot for Morrisons – I like their attitude, I like the fact they’re trying new things and they’re certainly the only ones trying other things as well as price to battle the discounter threat. But until they resolve deep-rooted cultural issues internally, they will continue to struggle. Time will tell if this latest initiative works – the “stonking deals” activity in the Christmas run-up did nothing for them, but this is a whole different affair. I wish them luck and also hope to see more great big ideas coming out of Bradford as long as Dalton can hold on.