January 16, 2019

Balancing Brexit and coping with costs – what does 2018 hold for grocery retail?

Last year saw the continued rise of the discounters, a number of major acquisition announcements and the rapid rise of delivery services. So, how has 2017 shaped the minds of grocery retailers? And what are their biggest challenges for the year ahead? Nick Huismans, Associate Director at Newton, looks to provide some answers.

Getting ahead of Brexit

Although costs are rising for a number of reasons, it’s no surprise that most retailers were still largely concerned by the implications of Brexit during 2017. Although the full impact of leaving the European Union won’t become clear until the country exits, the industry was finally getting to grips with how it can mitigate the fall-out. In reality, the fact that the vast majority of what we sell comes from Europe cannot be avoided. In 2013, Italy, Spain and France produced almost 68%[1] of all European fresh fruit, and 47% of fresh vegetables (excluding potatoes). However, customers are keen to buy British and this longer-term trend may go some way to help the industry overcome the challenge. Retailers are now thinking about what they can realistically grow in the UK – so expect to see more progress on this during 2018.

Further still, the weaker pound naturally means that anything a retailer needs to import will become more expensive. We all know that ‘Made in the UK’ doesn’t necessarily mean that a product won’t contain ingredients from further afield. However, familiar supply chain tactics such as sourcing more products, finding alternatives and establishing insurance options will go some way to make sure the UK still has the necessary raw materials.

Labour and productivity

Nick Huismans, Associate Director at Newton

There’s no denying that Brexit has already had a huge effect on the supply of labour. Last summer, the National Farmers Union[2] reported a 17% drop in the number of seasonal fruit pickers – leaving farmers critically short of people to harvest crops. This combined with wage pressures means that finding and sustaining workers will continue to be a challenge this year. Wages are also having an effect on the supply chain, with just under half of food manufacturers[3] (47%) stating that they couldn’t afford the National Living Wage.

These factors are all bound to have a knock-on effect on productivity and staff engagement. However, these kinds of labour challenges are usually linked to wider economic issues. In this case, as long as the value of the pound stays low, UK retailers will struggle to attract labour from overseas. On a wider scale, we’ve already seen Tesco and Sainsbury’s reduce staff numbers within the first few weeks of the year. But a continued focus on labour and productivity should also look at how automation can help to simplify stores and distribution networks.

Convenience is key for consumers

In March 2017, we saw the Consumer Price Index (CPI) move ahead of wage inflation for the first time since September 2014[4]. The natural knock-on effect of this will be that price becomes even more important to consumers. However, fragmented shopping habits and the trend for convenience will continue, with loyalty becoming even less relevant to shoppers. Research[5] found that location was the main driver behind supermarket choice for nearly half (48%) of consumers in 2017, ahead of range, habit and price.

The term ‘convenience’ means something different to every shopper. Overall, consumers have less money to spend but still want their shopping to be easily available. Some people want to shop online and have it delivered the same day within a certain time-slot. Others want to ‘click and collect’ but hand-pick their fresh produce (such as pre-prepared vegetables) from the nearest store. But convenience doesn’t just relate to online shopping; this increasingly varied model is the future of grocery retail. The big players are working out how to provide a breadth of convenient shopping experiences to customers without taking a hit in profit. Crucially, most have recognised that the first to crack the convenience challenge will be most likely to see their market share grow as a result.

Hassle-free and healthy

The convenience trend will continue to drive much of product innovation as more customers want the items they find on the shelves – or online – to make their lives easier. Although this is nothing particularly new, consumers will continue to switch their attention to products that are both easy to prepare and healthy this year. As a result, we’ve seen more space in store dedicated to combining both of these factors across all categories. Additionally, new innovations such as drinkable breakfast shakes are satisfying the health-conscious and time-poor consumer. But as we’ve seen in recent years, this trend will continue long after the usual January health-kick has subsided. This means that retailers will need to produce healthy and hassle-free innovations quickly and efficiently.

The rise in consumers becoming more environmentally conscious will also continue. The number of vegans in the UK is up 360% over the past 10 years to an estimated 550,000 people[6]. All this means retailers will need to satisfy an expanding number of customer demands – whilst further reducing waste.

Mitigating costs

Although convenience will undoubtedly be the biggest consumer driver this year, economic pressures mean that price is likely to rise in importance to shoppers. But with costs for retailers increasing in almost every area, the industry needs to find a way to mitigate major external pressures. The further challenge will be satisfying customer demand for a shopping experience that suits their lifestyle without passing on the associated costs. As a result, finding the balance between streamlining operating costs whilst still improving service levels has to be a priority for every retailer in 2018. At the end of the year, only the most efficient retailer who meets the consumer trend for convenience will come out on top.

[1] https://www.cbi.eu/sites/default/files/market_information/researches/competition-europe-fresh-fruit-vegetables-2016.pdf
[2] https://www.nfuonline.com/news/latest-news/drop-in-seasonal-workers-leaves-some-farms-critically-short/
[3] https://www.foodmanufacture.co.uk/Article/2015/08/03/Food-and-drink-manufacturers-can-t-afford-National-Living-Wage
[4] ONS – https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7
ONS – https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/timeseries/kac3/lms
[5] TCC Global research – https://www.tccglobal.com/blog/article/uk-shopper-loyalty-study/
[6] Vegan Society – https://www.vegansociety.com/whats-new/news/find-out-how-many-vegans-are-great-britain