A winning recipe for growth in food retail?

Planet Retail’s Robert Gregory outlines the trends dominating the global grocery market

The global economic downturn has had a significant impact on the retail sector – albeit to a lesser extent on the grocers, due to the fact that food remains a non-discretionary purchase.

Nonetheless, grocery retailers have primarily responded to the downturn in two ways:

  1. Promoting value through the expansion of discount stores, economy ranges, price investments and increased promotions.
  2. Reducing costs and preserving cash by slowing growth plans and making staff redundant.

Over the next five years, Planet Retail forecasts the Top 30 to grow sales through grocery formats at a compounded annual growth rate (CAGR) of 5.2 per cent, compared with the 10.8 per cent recorded for the previous five years.

Store numbers, meanwhile, are expected to rise at a CAGR of 3.5 per cent, reflecting the fact that a slowdown in expansion will see retailers focusing on their most profitable existing stores.

Discount and small formats to the fore

One of the winning formats for the Top 30 will be the discount channel, which is expected to add $71bn in sales over the next five years. Driven by retailers such as Aldi and Schwarz Group, the no-frills format continues to attract cash-strapped consumers both in developed and emerging markets. By 2013, the Top 30 retailers operating in the discount segment are poised to open an additional 12,600 stores.

Discount stores are just one of the smaller store formats doing well. Retailers are increasingly likely to focus their efforts on small-box stores, given that they require less capital both to build and operate. In fact, stores less than 26,910 sq ft are poised to grow their store network by 4.1 per cent over the next five years compared with just 2.2 per cent for the large hypermarkets.

Also, in the long run, the outlook is positive for proximity retailing as demographic changes mean that there will be more single households combined with lower incomes (because of a higher share of pensioners) and less widespread car ownership.

This is especially the case in the US, where Tesco’s entry has sparked a series of reactive pilots, the most notable being Wal-Mart’s Marketside format, the retailer’s first new concept in the US in a decade. It is too early to say whether small-box will change the face of grocery retailing in the US, as this type of format caters to a very different shopping mode (high frequency/low spend), assortment (greater emphasis on fresh, private labels) and consequently calls for more frequent distribution.

As well as requiring relatively high investment, hypermarkets and superstores, despite being the backbone of many retailers’ strategies, are faced with a lack of available sites, increasingly prohibitive regulations, and a high degree of retail maturity in developed markets such as Western Europe and North America.

However, in the future, the channel will find more fertile grounds for growth in the developing markets of Asia and Latin America. Retail giants such as Auchan, Tesco, Carrefour and Wal-Mart still want to expand their hypermarket presence in markets such as China.

That said, the fact that such retailers are experimenting with smaller formats in these regions (eg, Tesco Express and Wal-Mart’s Smart Choice) suggests they are already planning for the increasing saturation in the large store sector in the emerging markets.

Indeed, internationalisation will continue to be a key trend, with the world’s largest grocers continuing (and in some cases increasing) their investment and commitment overseas. For many, such as Tesco and Carrefour, reducing their reliance on saturated home markets is part of a long-term strategy that will involve them looking beyond the present economic climate to years, if not decades, ahead.

With this in mind, markets such as India – where market entry by the world’s largest retailers is imminent – and Vietnam assume an even greater importance.

Multichannel, single-brand

Another key trend is the move towards multichannel/single brand. Carrefour’s conversion of its French store base to trade under the eponymous Carrefour name should help to strengthen the brand and create buying synergies across its supply chain and via its marketing campaigns. The retailer’s recent announcement that it is to replace its existing No. 1 economy private-label range with the new Carrefour Discount brand is all part of this approach. It is likely that future conversions will occur – particularly in Europe, where operating multiple formats is commonplace.

Private labels set for renewed focus

Against a background of tightening consumer spending, private labels are set for strong growth in almost all markets and for virtually all retailers.

Like discounters, the growth of private labels is nothing new. However, as economies weaken and consumer confidence dips, we are seeing accelerated growth in this arena. The trend is not just confined to the more mature markets either. While private label penetration is presently lower in emerging markets such as India, Brazil and Mexico, these countries are poised for the fastest growth in the coming years.

Also worth highlighting is the sophisticated positioning of own-label products emerging from some retailers, much to the dismay of many brand manufacturers. Retailers are cherry-picking consumers at both ends of the market by developing their economy ranges as well as premium lines.

One such example of a shift in strategy is Tesco’s new Discounter brand. Representing a shift away from the traditional three-tier strategy, Tesco is launching its first labels without the Tesco brand in order to fight German discounters Aldi and Lidl.

The growth of private labels represents a huge threat to the brands that have to compete, not just in terms of price but also for less shelf and promotional space.

With this in mind, Wal-Mart’s recently revamped, expanded and relaunched Great Value private label offering is sure to send a shiver down the backs of both major food and drink manufacturers and competing retailers in the US. With price differentials of up to 20 per cent over national brands and with a stylish new look, this might be the most significant makeover in the US retail sector in recent years, with significant long term impacts.

Is price here to stay?

The big question is what will the retail landscape look like when economic conditions improve? Certainly, some trends such as internationalisation will remain as important as ever as retailers are looking at the long-term picture in such cases.

But, what of the current popularity of discounters and private labels? In both cases, evidence suggests they will continue to grow – albeit at much lower levels than what we are seeing at present.

The past two decades have seen ongoing growth of discounting and private labels globally, even when economic conditions have improved. With many consumers stepping foot inside a discount store or switching from a brand to a cheaper private label for the first time, such recently formed shopping habits may prove to be difficult to break.

Robert Gregory is retail analyst at Planet Retail.

Inspired by McDonalds, Wal-Mart Creates Its Own Dollar Menu.

McDonald’s (MCD) did so well with its dollar menu that Wal-Mart (WMT) decided it will create one, too. The difference is that the Wal-Mart version will be merchandise and not food. McDonald’s philosophy of selling very inexpensive food in a clean, well-lit environment served by consistently friendly people has helped it expand its operations to 36,000 stores worldwide. Wal-Mart’s approach to retail stores is not terribly different. It may not be entirely coincidental that Wal-Mart was started in 1962 and McDonald’s began in 1955. Millions of relatively young people, most of them parents, were only a decade removed from serving their country and not being paid a great deal for that service. It was a perfect environment for consumers to believe that something could be inexpensive and a good value at the same time.

Earlier this week, Wal-Mart, the world’s largest retailer, said that it planned to improve its second quarter sales by offering shoppers irresistible bargains. For the last quarter, Wal-Mart reported flat earnings of $.77 and said it expected to deliver a range of $.83 to $.88 in the current period. Same-store sales for this quarter are expected to be between flat and up 3%. Wal-Mart may have an uphill fight to post strong second quarter earnings. Recent employment numbers and shrinking access to credit will hurt retail sales, although Wal-Mart probably has its share of people who pay cash.

According to Reuters, “Treasurer Charles Holley said Wal-Mart has planned a number of merchandising initiatives to appeal to cash-strapped shoppers, including its dollar program.” The theory behind the promotion is sound. Most stores could not bring in a lot of revenue selling items at $1 a piece, nor could most restaurants, but Wal-Mart and McDonald’s have such significant scale and customer bases that getting an even slight increase in discretionary spending from tens of millions of people could make the difference between a mediocre quarter and a good one.

Wal-Mart and McDonald’s are often criticized for selling “cheap” food and merchandise and treating their employees poorly by paying them very modest sums. There may be some truth in both charges but that true comes with another side to it. Many people who eat at McDonald’s and shop at Wal-Mart are from the lower economic classes. McDonald’s and Wal-Mart do not exploit that by selling these people junk. George Soros may not want to wear shoes from Wal-Mart and eat McDonald’s hamburgers but that does not mean that both establishments have not helped feed and clothe people who might otherwise struggle.

Workers at McDonald’s and Wal-Mart are not paid well. Waiting on people in a big-box retail outfit or cooking and serving fast food will never pay well. The jobs don’t require any special skills and so they do not come with a premium wage. Wal-Mart does employ 2 million people, which is a lot of individuals to keep on a payroll during a recession. McDonald’s has 400,000. Neither place has announced significant layoffs and neither is likely to. (Read: “The Burger That Conquered the Country.”)

Charging people a dollar for a meal or for some modest item off a retail shelf may seem like a gimmick to pick up a penny a share for the next quarter. It is a good deal more than that. When a dollar is all that someone can spend, that person doesn’t care if his purchase increases the company’s earnings.

Waitrose scraps delivery charges.

The upmarket supermarket chain is abolishing the charges, which total £3 between Monday and Wednesday and £5 for the remainder of the week, as it tries to accelerate online growth that is currently running at 60pc.

“We want to ramp up the volumes,” said Mark Price, managing director of Waitrose. “Delivery charges are a real irritation for customers when they’re spending £90 on a shop.”

Britain’s worst recession in more than two decades has heaped pressure on supermarket chains to pitch their pricing strategies correctly as customers tighten their belts.

Waitrose, with 200 branches across the UK, has benefited as people eat out less, according to Mr Price. The chain, which recorded a 6pc jump in sales over Easter compared with last year, said it was winning customers from rivals such as J Sainsbury.

Owned by The John Lewis Partnership, Waitrose is betting that its move will help prise shoppers away from rivals in the online grocery market, which it claims will enjoy sales of £13bn within four years.

The charges will cease from Wednesday although the Waitrose Deliver service will still require a minimum order of £50. Waitrose Entertaining, its service for party food and drink, does not have a minimum order requirement.

The decision to scrap the charges comes in the same week that shoppers at online delivery service Ocado will be able to buy Waitrose food cheaper online than from the supermarket for the first time.

John Lewis Partnership has a stake in Ocado but does not fully own it, so the internet delivery company is able to charge what it likes for Waitrose products.

Mr Price has said there are many promotions that Waitrose runs in store that Ocado does not offer. The free delivery is not being offered by Ocado.

Mr Price said trading in the first three months had been better than expected and he was in the optimists camp regarding the rest of 2009.

Make-up and marketplaces are tops for beauty and apparel shoppers.

In March, eBay came out on top for traffic to beauty and apparel retail sites while Mary Kay was No. 1 for time spent, Nielsen Online reports.

eBay was the traffic winner despite posting a 44% traffic decline. 6.5 million shoppers visited eBay Clothing, Shoes and Accessories last month, Zappos was second in line with 5.2 million visitors, a 55% increase from a year earlier.

Visitors to Mary Kay spent on average a whopping 2 hours and 23 minutes on the make-up site—far longer than Avon, which ranked No. 2 with nearly 50 minutes.

The top 10 online apparel and beauty shopping destinations in March with unique visitors in millions this year compared to a year earlier and the percent change, according to Nielsen Online were:

* eBay Clothing Shoes & Accessories, 6.57,11.64, -44%
* Zappos.com, 5.23, 3.38, 55%
* Victoria`s Secret, 4.89, 4.20, 16%
* Avon 3.94, 4.20, -6%
* Lands’ End, 3.88, 3.47, 12%
* The Gap, 3.81, 2.38, 60%
* Old Navy, 3.54, 3.36, 5%
* eBay Jewelry and Watches, 2.72, 4.81, -44%
* L.L. Bean, 2.48, 2.70, -8%
* Shoebuy.com, 2.25, 1.94, 16%

Unique visitors count only once each shopper who came to a site, no matter how many times the shopper visited. This is a custom list compiled by Internet Retailer of the top e-commerce sites in this category based on Nielsen Online data. Rankings may contain multiple web sites from the same retailer or manufacturer.

By length of visit, the top 10 apparel and beauty sites in March (hours:minutes:seconds), according to Nielsen Online, were:

* Mary Kay, 2:23:10
* Avon, 0:49:58
* Lane Bryant, 0:30:17
* Woman Within, 0:18:49
* Blair.com, 0:18:25
* OneStopPlus.com, 0:16:30
* Victoria’s Secret, 0:16:24
* Sierra Trading Post, 0:15:11
* DavidsBridal.com, 0:14:45
* eBay Clothing Shoes and Accessories, 0:14:04

The top eight consumer goods industry segments in terms of online ad impressions (in millions) in March, according to Nielsen data, were:

* Food & Beverage, 3,490.70
* Personal Care, 3,354.67
* Print Publishing, 1,159.02
* Home & Garden, 985.01
* Apparel & Jewelry, 685.80
* Automotive Supply, 417.50
* Toy & Hobby, 150.57
* Recreational Gear, 146.14

Lotte Group to open a new Lotte Mart in the Weihai

The South Korean Lotte Group has signed a contract with Weihai Jiulong Real Estate to open a new Lotte Mart in the Weihai Economic and Technical Development Zone in Shandong.

With an investment of USD30 million from Lotte Group, construction of the new supermarket will start in April 2009 and is expected to be completed and opened on October 1, 2010. Covering an area of 36,000 square meters, the supermarket will focus on the sales of apparel, footwear, food, and home appliances. After the project is putting into operation, it is expected to realize annual sales of CNY400 million.

The coming of Lotte Mart will further add to the commercial functions of Weihai Economic and Technical Development Zone, which will benefit the creation of a business cluster in Weihai and will stimulate the development of service industry in the city.

Lotte Group currently owns 58 Lotte Marts in South Korea and with the implementation of its globalization strategy, the group plans to set up 300 Lotte Marts in China by 2018.

Convenience stores join price war

TAIPEI, Taiwan — Domestic convenience chain stores and fast food restaurants are joining a price-cutting war, triggered by fast food chains McDonald’s and Kentucky Fried Chicken, in March by slashing prices of their meal boxes, making office workers able to enjoy increasingly cheaper lunch meals.

Family Mart convenience stores, for instance, will launch three new kinds of meal boxes at a unit price of NT$50, lower than the previous price of NT$60.

Lin Chui-chuan, public relations manager of Family Mart, said that Family Mart will launch the “one NT$50 coin can settle one meal for you” campaign to attract patronage from more office workers starting March 10.

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Waitrose unveils convenience store in Nottingham

Waitrose’s convenience store offers fresh fish and meat

Waitrose opened its first convenience store yesterday, in Nottingham. The 5,815 sq ft (540 sq m) shop, in the city’s Trinity Square, is located opposite the John Lewis department store and is the first of a four-branch convenience store trial.

The shop has fresh fish and meat counters, a bakery and a self-service food bar where shoppers can select from smoothies, granola and yoghurts in the morning and sandwiches and salads for lunch and evening meals.

Waitrose managing director Mark Price said: “We believe you shouldn’t have to compromise on the standard of your shopping experience just because a store is smaller and designed for convenience. We want to revive the traditional service typical of convenience shops, which customers value, but within a fresh and contemporary setting.”

Waitrose plans to open a second convenience store in Bristol in the spring.

* Published: 12 December 2008 12:47

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