COVID Shakes up the UK Grocery Landscape

The UK grocery retail market is highly competitive and dominated by the ‘big four’ incumbent hypermarket/supermarket operators: Tesco, Sainsbury’s, Morrisons and Asda with a 68% market share at the end of 2019. Over the last 10 years, these players have faced challenges, as discount supermarkets Aldi and Lidl grew their market share from 5% in 2010 to 10% in 2015 and 13% at the end of 2019 (see Fig. 1).^[1] 

Fig. 1: 12 Week Till (Register) Roll as % of Total Grocers (sales excl. fuel) – Market Share

Source: Citi Research, Kantar Worldpanel

The Australian supermarket landscape has experienced a similar shake up. While market leaders Woolworths and Coles continue to dominate with a market share of 33% and 27% respectively, Aldi has made significant inroads, increasing its market share from 7% in 2011 to 12% in 2019.^[2]

Discount supermarkets have narrow product ranges of around 2,000 items compared with 25,000 at a typical supermarket. By keeping the offer simple (such as one type of ketchup), costs and retail prices can be lower, which attracts thrifty customers. In 2010-2015 the price gap between discounters and the big four on similar products was 20-35%.^[3] 

Initially, the big four accepted weaker sales performance and share losses in return for maintaining their profit margins, however, in 2015 this became untenable. Market leader Tesco announced a profit reset, effectively accepting much lower profits in the short term, as it invested in the offer and reduced prices. In the years since, value leader Asda and Tesco have repriced core items (about 500 of the most commonly purchased) to closely, if not perfectly, match the levels of Aldi and Lidl.^[4] In shopping basket surveys the gap has reduced from about 20%/25% to 10%/15% for Asda/Tesco.^[5] 

These efforts, as well as constraints on discounters finding new sites and building new supermarkets, have resulted in Aldi and Lidl’s growth slowing from ~20% p.a. to 8% p.a. between 2017 and 2019. This growth rate still meant market share gains of about 1% per year, and kept investors apprehensive when considering the sector.

In 2020, the coronavirus and social distancing measures have led to both increased demand in the grocery channel (as consumers eat at home more) and a shift towards buying groceries online. This has led to something of a reversal of fortunes for the big four, as they dominate the online grocery landscape (along with Ocado), while neither Aldi or Lidl participate. 



Source: Citi Research, Kantar Worldpanel to end November 2020

Unfortunately for the big four supermarkets, online grocery is less profitable as picking the items for customers and delivery costs are incurred (unless customers use click and collect). While customers pay a charge for delivery, in the past, these charges were often reduced or waived to attract customers, so consumers are accustomed to, and only accept, reasonably low charges. 

Around the world, supermarkets are working on improving the economics of online shopping by picking orders via central fulfilment centres (like Ocado), or with in-supermarket automation (urban fulfilment centres). Delivery costs are slowly falling with the improved route density that comes with more scale, and better productivity. Supermarkets also aim to better monetise their e-grocery websites and customer data, or to use that data to increase revenues by being more efficient with promotions.
   
With the change in customer behaviour seen this year, many more consumers will likely now recognise the convenience and benefits of online grocery shopping. This gives the big four a multi-year opportunity to improve their market share trends against discount competitors, while working to improve online grocery profitability, by either gradually increasing prices to reflect the additional service or applying technology to save costs/generate more revenue.
  
Over the coming years, investors should be watching closely to see how this develops and alters the competitive playing field. In any case, the big four supermarkets are not standing still in their legacy businesses, undertaking significant cost reduction efforts within stores, such as reducing the number of counters and automating checkouts to reduce staff costs. These large complex old businesses are also benefiting from the technology revolution and applying new tools to better manage their stores and customer offer.

[1] All market share data and charts are based on Kantar Worldpanel survey data to end November 2020 and sourced from Citi research.
[2] Source: Roy Morgan Fresh Food and Grocery Report, December 2019.
[3] Source: mysupermarket.com, Bernstein analysis.
[4] Source: mysupermarket.com, Bernstein analysis, Tesco Aldi price match.
[5] Source: Exane BNP Paribas 30 key item price survey.

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