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 This year looks set to be one of change for the UK convenience market. IGD's Stewart Samuel considers the implications for the sector of a more value conscious consumer, on-going consolidation and how operators may benefit from a raft of high street failures.
Tough start to the year
While Christmas 2008 was a tough one for retail in general, sales through food and grocery retailers remained relatively robust. However, the outlook for the year ahead remains uncertain, with unemployment set to rise, house prices still under pressure and consumer confidence remaining low. What is certain however, is that value for money is going to be at the front of shoppers' minds, and the convenience sector will increasingly have to respond on this issue.
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Over the last ten years, modern convenience retailing has developed and flourished during a period of relative affluence and prosperity. Investment has taken place in the upgrading of store formats, expanding chilled and fresh categories, and developing food-to-go offers. However, consumers are now buying more frozen and less prepared foods, as well as choosing to cut down on eating out at home, favouring to cook from scratch.
At the same time, our research, Adapting to Change, reveals that consumers have been using their neighbourhood stores more frequently, potentially as a consequence of their attempts to reduce spending on fuel. However, with the oil price now around $40 a barrel, will there be a migration towards out-of-town supermarkets which present a compelling value-based offer both in food and non-food?
Price premium under pressure
Convenience operators have already started to respond on price and value. In the run-up to Christmas, promotional activity in the sector was significantly up-weighted, in line with the broader food and grocery market. Tesco introduced its discounter ranges within its Express format stores, The Co-operative Group launched its 'A Great Deal Locally' campaign, and the independent sector was supported with hard-hitting, limited period deals. If delivering great value for money is set to remain at the heart of the agenda within the major multiples, the convenience sector will have to continue responding throughout 2009. Price premium which the sector has been able to justify, may become that much harder to deliver.
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The Somerfield deal is expected next month |
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Consolidation will place further pressure on pricing
Pricing is also likely to be under greater pressure following The Co-operative Group's acquisition of Somerfield. With the deal expected to be completed next month, the enlarged Group will emerge as the UK's fifth largest food and grocery retailer, holding around 8% market share. Almost by default, the retailer will have to follow the general direction of the broader market, and in 2009, it will be all about price and value as the recession really starts to hurt.
However, this deal will also have a much greater impact across the food and grocery sector in general. The divestment process will create opportunities for other retailers to expand their store portfolios, helping them meet expansion plans. It could also kick-start further consolidation as existing operators adopting defensive positions. At the same time, pre-emptive action could intensify competition as rivals seek to take advantage of the Co-operative Group's focus on integrating two businesses.
New entrants on the scene
Waitrose is likely to be one of the retailers that will be seeking to capitalise on the divestment process following its entry into the convenience sector. Having developed a new offer at its first convenience store, albeit in a significantly larger than average store at c.6,000 sq ft, three more stores will open this Spring. If successful, a roll-out of the format is expected to follow quickly, particularly as there will opportunities to acquire sites in prime, high street locations following a series of high profile business failures, with Woolworths being the most notable. While capital expenditure may be under pressure across the retail sector in general, the opportunity to acquire a larger number of sites may be too good an opportunity to miss out on, and several operators may add significantly to their estates in the year ahead.
Value challenge from the discounters
What we also expect to see during 2009 is a stronger competitive threat from the discounters. Operators such as Aldi and Lidl have been flexing their propositions to target convenience shopping missions, introducing sandwiches, chilled drinks, and newspapers and magazines. The launch of the Lidl Express format earlier this year, and the 99p meal deal, provides an indication of their ambitions in this area. Coupled with the increasing focus on value overall, the price premium which convenience once commanded is now clearly under threat.
Opportunity for innovation remains
Despite the focus on price, the convenience sector carries on offering the potential for innovation. Format development continues to move ahead at pace within the forecourt sector, particularly as many of the independent multiple groups up-scale their operations and develop their own individual identities. The penetration of food-to-go offers is also starting to grow more rapidly beyond this sector, with high street based stores starting to compete more effectively with traditional foodservice outlets. However, with a focus on cost control and managing cash flow, innovation in process will be just as important as product innovation.
A strong and solid year forecast
In summary, the convenience sector is forecast to grow throughout 2009, although the rate of growth may not match that of earlier years. However, many of the drivers which have supported growth over recent years continue to be in place. Although the sector will have to carry on responding and meet the value challenge, driven by both the changing priorities of consumers and trends in the broader food and grocery market, currently, shoppers are not showing any less propensity to spend in convenience stores.
More information:
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UK Convenience Outlook
IGD's UK Convenience Outlook report is IGD's complete guide to this evolving sector, including convenience sector size & structure, profiles of convenience operators and outlook for the market. |
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Adapting to Change: Shoppers and the Credit Crunch
Understand how the economic downturn is affecting shopping habits including store choice and brand loyalty with this IGD report. |
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