DISRUPTION, DISTORTION AND DE-ESCALATION

We're now one year on from the WHO declaring COVID-19 a pandemic. What started as 'just a few weeks' of working and staying at home to protect citizens soon turned into months of lockdown, then a year of social distancing. Everything has changed, from the way we work to the way we live, the shopping experience and even the goods we buy. After that monumental year, this report reflects on the changes the FMCG industry has faced, how traditional grocers have been disrupted and what this may mean for the year ahead.

Immediate disruption

As the first lockdown was announced, our high streets became unrecognisable – with empty pavements, no traffic and limited footfall. Meanwhile, grocery stores had queues like never seen in modern times and delivery slots were booked up weeks in advance. A rapid shift to online shopping transformed the way retail operates. Those who were quick off the mark were able to be a part of the explosion of online retail that resulted in a third of all UK retail purchases being made digitally in November 2020 (Source: ONS Retail sales, Great Britain: November 2020)

But what about grocery sales? Whilst most retailers rapidly scaled up to accommodate the surge in online shopping, in contrast to many other industries, online grocery is still comparably small. Even now, online grocery sales represent just 10% of total retail sales in grocery outlets. (ONS November 2020)

The question remains – can traditional grocers adapt their infrastructure fast enough? If not, we may see digital players such as Amazon, who have Amazon Fresh, take advantage of their delivery infrastructure and the gig economy to draw customers in.

The challenge for online grocery

The reasoning behind the lag seen within the grocery industry is simpler than many may think. The vast size of the prize brings with it intense competition; this, in turn, brings low price inflation and with this comes low margins. Additional pressure includes a focus on prices rather than quality, particularly when thinking about cash-strapped families who have been impacted by restrictions. And don't forget, any increased costs due to inflation and the impact of Brexit have not yet been felt by the shopper due to the competitive landscape.

These comparatively low margins are the sticking point for traditional grocers' expansion online.

Basket price is critical to making a profit or loss in online grocery retail. With relatively fixed delivery costs, it is roughly the same cost to deliver one packet as it is to deliver a week’s worth of shopping to the doorstep. The weekly shop proves viable in terms of profit due to the cost being absorbed by the scale of the transaction at a low margin, while the single packet is a loss. While this makes sense to those within the industry, consumers may question any minimum spend or delivery charge.

The opportunity for retailers is to increase spend per transaction as well as shopper loyalty in order to increase their overall Customer Lifetime Value. In a recent paper, we discuss what could be the retail industry’s new approach to driving strong shopper loyalty through behavioural marketing.

So, what should retailers do? Evolve or create?

Traditional grocery is in many ways trading in the past, with complex infrastructures that are slow to adjust and need to deliver profits year after year.

An increasing number of occasions are being fulfilled by online and direct to consumer.

The digital player's profits are in their future, trading off their potential position in future markets, reinvesting profits into growth or attracting speculative investment. Returning profit today is not as critical. Bringing a technological solution to the puzzle allows for more flexibility to develop new solutions. Once proven, the concepts are instantly scalable, driven by the very flexible, low investment gig economy.

The increasing threat from non-grocers.

UK Subscription Boxes Market:

• Forecast to reach £1B by 2022.
• Gaining new customers as high street footfall decline and retailers feel the pressure to fulfill online demand.
• Over ¼ of UK consumers signed up.
• 58% of subscription box businesses are planning to invest in new subscription offers. Up 72% in 2020 vs 2017.
• To keep up with the growing demand for grocery deliveries, Morrisons, M&S, Lidl have also launched home delivery subscription boxes. Boxes have included core range basic products to help shoppers stocking essentials.

Source; Retail Gazette Sep 2020

Subscription services offer customers a seamless and convenient experience as well as helping with budget management. Rewarding existing clients but locking new clients into a deal helps these companies to grow their customer base but remain a premium offering.

The impact of shoppers moving to online and D2C is largely unknown but the brand ambition for the transition is clear as illustrated by the recent Adidas announcement. They have shared that ecommerce is expected to be the single biggest driver of growth as they seek to double online sales by 2025 to up to €9bn.

Despite being a different industry, the implications for Grocery are undoubtedly significant.

Trading down and recessionary behaviour

Before the pandemic, discounters were seen as a game-changer in the market as Aldi and Lidl continued to gain a larger foothold. However, 2020 saw subdued growth as they were limited by the lack of online presence and the challenge of safely processing customers in-store during periods of high demand. As yet, there has been no significant evidence of customers trading down or recessionary behaviour at a macro level within grocery.

While not through choice, consumers are spending more time dining in. This has resulted in a -12% reduction in food and drink spending at a national level (Source; IGD COVID-19 continues to cause significant shifts in the food and drink industry 03 February 2021) and a growth in branded products over own label in supermarkets, reinforcing the hypothesis that we're trading down from eating out to branded products eaten in.

It is striking that the main consumer trends we saw in the last recession are the exact opposite of what has played out during the last 12 months. When we learn to live with the virus and the looming recession really starts to bite into consumer spending in our industry, we are likely to see a return to the main factors:

• Consumption migrating from branded products to private label
• Shoppers favouring value channels such as discounters
• Increased promotion [and everyday price competition]

So, while some brands have been experiencing an ‘Indian Summer’ on value, there could be a harsh winter ahead – and getting the value proposition right could make all the difference. We discuss this further in our paper; Recession Resilient Pricing: how to manage retail revenue as the market demands ever cheaper prices.

Long term market disruption

Baby Boomers have been at the heart of grocery evolution, with this base being the largest (IRI Data 52 weeks to March) and most affluent right now. This segment delivers a good proportion of traditional sales.

However, we need to look to the future.

Those under 30 spend 40% less per person and 30% less as a group, compared to 30 to 65-year olds on groceries (ONS Household expenditure by age of household). There are also now 25% fewer under 30-year olds than 30 to 65-year olds.

There is a danger that the windfall gifted to many food and drink categories due to social restrictions boosting sales by more than 6% in 2020 (IRI Total Store View 52 weeks to 26 Dec 2020) could be masking or distracting from these big market distortions, many of which are likely to stick once social restrictions are lifted, and the temporary windfall passes.

The pandemic has accelerated many existing trends. Social restrictions and three lockdowns in 10 months have impacted categories in different ways. The Ambient, Frozen and BWS sectors have all experienced double-digit growth as we swapped commuting for home cooking, aiming to replicate the "out of home" experience and drinking out became drinking in. Healthcare, which historically was the main source of driving value growth across the total store, has struggled as social distancing impacted most OTC markets.

Distortion is likely to continue in 2021, but we can see changes taking place mid-year, which will impact key sectors. We predict still more distortion into 2022, and all depends on the progress of the vaccine roll out and our ability to curtail the spread of Covid-19.

What is likely to continue in the near future?

• Key food sectors will continue to see growth, but growth will slow down as we start easing restrictions.
• Household sectors are likely to continue to grow (+10%) as hygiene will continue to be an important part of consumers' daily routine.
• Growth in Healthcare (+8%) is likely to be more visible in 2022 as we start to see more of a return to normal.

Source; IRI Forecasting Analytics

As demand outstripped supply in 2020, both promotions and media support were reduced.

A challenging combination of high consumer demand and the supply chain being tested like never before, meant that maintaining availability on shelf became the most important priority in 2020.

In the latest figures from IRI Promotext, all categories are selling less on deal and whilst deals are slowly coming back, uplifts have been impacted.

Unsurprisingly, within media, the recovery now reflects a significant move towards digital. TV remains the dominant vehicle, but with older cohorts now adapting to digital.

In contrast to the media cutbacks in 2020, 2021 already feels different, with many brands announcing increased media spend. In a recent paper, we shared an Advertising Consideration Matrix in which we suggest some key considerations to take into account before making any decision regarding advertising.

Whilst uplifts vary across categories and brands, we know that on average, promotions deliver 0.13% value uplift at a category level for a retailer. So, the big question now is what happens when those large out of aisle promotional opportunities are removed?

We anticipate significant changes to macro space in larger affected stores, those above 2000sqft. Decisions on ranges at fixture are likely as retailers consider how to fulfil demand for on shelf promotions that deliver worthwhile uplifts. In short, this is likely to mean an acceleration in range rationalisation in order to give more space on shelf to the highly promoted products.

Whilst many are anticipating a 2022 gold rush for vacated gondola ends by brands and categories unaffected by the new legislation, this oversimplifies the situation. The impact is not purely felt out of aisle. There is an opportunity for retailers to review and reapportion macro space between categories on a scale that we have not seen in a long time.

CAN RETAILERS FIND THE RIGHT FORMULA OF SPACE AND CATEGORIES IN ORDER TO MITIGATE THE IMPACT OF THE CHANGE?

2020 has seen changes that we could not have imagined at a breath-taking speed. The market has been disrupted, distorted and de-escalated in many areas – but we are only halfway. In 2021 we expect to see more change impacting the sector and cannot fall back on pre-COVID strategies to move forward. Understanding how customers and the industry have evolved is important for all retailers and brands. Investing in the future is the next step and one we're excited to be a part of.