Major shake-up in the UK Grocery market

Recent news on traditional UK retail brands has largely been bleak, with bankruptcy, store closures and refinancing routes being followed by many, including Toys R Us, Carpetright, Mothercare, Moss Bros, New Look, Maplin, Claire’s Accessories, Marks and Spencer and Homebase, among others.

The UK grocery market has also been changing in recent years. Seeing issues on the horizon, it is no surprise that Sainsbury’s and Asda are undertaking strategic investment for the future. The key questions are why do they feel the need to do this now, what will it mean for the UK supermarket scene and what effect will it have on consumers?

Competition from below
There is, and has been for a number of years now, increasing competition from discounters Aldi and Lidl, who have been growing a steadily creeping market share. These previously unfashionable budget supermarkets have become something of a vogue in recent times, as it becomes increasingly cool among shoppers to get a bargain.

Figures from the last quarter of 2017 show that they managed to grow their sales by a massive 16.8% from the same period in 2016, and their market shares similarly increasing – Aldi from 6% to 6.8% and Lidl from 4.4% and 5% over the same period.

New trading model
Overall, the relationship with consumers has changed and is constantly evolving; price, service and delivery efficiency have become key brand differentiators, calling into question previously established traditional brand loyalty.

Online shopping is a growing trend, and is now a way of life for many consumers who use the web to simplify their shopping habits. Online specialist retailers, like Amazon and ASOS, have transformed markets for many products and the grocery marketplace is now under threat. In 2016, almost half of Brits shopped online for groceries, with about one in ten doing all of their grocery shopping online. Each of the major grocery brands now has a significant online presence and offers online shopping and delivery. ‘Click and collect’ has also proven to be popular, giving the customer greater control over their experience.

According to Neilsen research, online grocery sales in Britain rose by 4.6 per cent in 2017 to £6.6 billion giving the channel a 6.4 % share of the market. So it is not that online shopping has taken over, but the threat lies in how it will grow and continue to take market share. To date, most of the online grocery market share has proven to be an additional channel for the existing retailers, but online shopping presents an avenue for potential new entrants into the market.

Amazon is considered to be one of the major threats to the current supermarket status quo. It launched Amazon Fresh, a same-day grocery delivery service, in 2016. It has since begun a partnership with Morrisons, which allows Amazon Prime customers to order Morrisons products online through Amazon and have them delivered. Additional acquisitive moves by Amazon in Europe and the United States, according to many, show that Amazon will make a further aggressive surge into the UK grocery business, potentially channelling more customers away from in-store experiences.

The existing behemoth
Tesco has been the market leader in UK groceries since it overtook Sainsbury’s in the mid-1990s. And since that time, it has grown into its role as the biggest power player in the market, with a market share almost double that of its nearest competitors, who happen to be Sainsbury’s and Asda.
Tesco has experienced a recent merger, and benefitted from the growth associate with this, having bought the wholesaler Booker in late 2017.

Asda and Sainsbury’s as brands
Given the above factors and their present market positions, Sainsbury’s and Asda have been unable to grow at a significant rate. Hence a change was required.

Both have historically positioned themselves in different areas of the market, with Sainsbury's focused at the middle to high end of the market and geographically based more in the south, and Asda focused on lower-cost groceries and geographically based more in the north.

Sainsbury's have said that the merger of the two brands would generate synergies of at least £500 million pounds and enable prices to be lowered by about 10% on many products. However, they have also said the two stores will retain their current branding.

The stores will continue under a single management structure, with Sainsbury’s Chief Executive Mike Coupe at the helm, which raises a lot of questions. For instance, how this will affect the customer perception? As people’s shopping habits, and lives, have changed there is a perception that shopping is more a matter of convenience and cost-sensitivity rather than brand loyalty. This is part of what has triggered the growth of the budget retailers. How will customers react to this change?

There are cautionary tales of past examples where major supermarket mergers that did not go well, with perhaps the most compelling being Morrisons-Safeway which lost 28% of their sales following their merger. One of the biggest struggles encountered in this case was trying to merge two different cultures. Will the decision to keep the Sainsbury’s and Asda brands extend to their working cultures? Will they be able to be kept separate in the long term?

Winners and losers
Perhaps the major winner out of this merger will be Argos, who has itself struggled in recent times. Sainsbury's took over Argos in 2016 and since then has been closing separate Argos stores in favour of Argos stores within Sainsbury’s; a successful implementation of the click and collect system. There is talk that post-merger, Argos will be rolled out into Asda stores as well.

And beyond the UK, Walmart, who are to retain a 42% stake in the combined business, have said that they are interested in potentially bringing Argos into Walmart stores in other countries.

On the other side of the fence, suppliers now face being squeezed even more than in the past, with over 60% of the market now owned by two companies who will now have unprecedented buying power.

How this will be viewed by consumers and the authoritative powers, is yet to be seen. At Moore we will monitor the unfolding of this new merger and continue to report on the brand and business implications.