Retail’s budding potential

Contrary to current wisdom, bricks and mortar retailers have as much potential for growth as their e-commerce cousins – but they must act quickly.

The Internet has received lots of media and industry interest as a retail channel for food and drink. But a new report by Datamonitor, called Retail Revolution, has discovered that this interest may be leading companies to ignore the strong growth prospects in the old retail economy.

A major consolidation trend is sweeping across companies in Europe to enable them to compete on a global level. This is being driven by the benefits of increased bargaining power, the ability to reduce per unit IT costs by leveraging systems across larger companies, and the ability to share best practice information. Between different countries there are large differences in the level of consolidation.

With 33.3 per cent of grocery market sales being made in the top three UK retailers – Tesco, Sainsbury’s and Asda – the UK has a lower level of concentration than many other countries. The potential for further consolidation can therefore benefit a select few retailers if they can overcome regulatory barriers.

But this trend also creates an opportunity for other types of retailers. The large multiples generally compete on price, but consumers are becoming more experimental in their food purchases and are trading up to higher value goods. Although premium quality products are entering into the multiples, such as the Tesco Finest range, this development is creating opportunities for specialist and high quality retailers to exploit this market by offering wider ranges and by competing on service.

There are also major opportunities for retailers to diversify beyond food into the more profitable non-food sector. In 1999, Tesco and Asda had a 25 per cent and 31 per cent share respectively of the non-food sector. Others such as Safeway and Morrisons had significantly less than this.

Wal-Mart’s takeover of Asda and the media coverage of “rip-off Britain” has forced retailers to make their prices more competitive, so decreasing the margins that can be made on food goods. As a result, non-food goods often command higher margins than branded food and private label food – a clear incentive for retailers to increase their levels of non-food stock.

There is, therefore, potential for large multiples – or large stores with high “footfalls” – to provide a “one-stop-shopping” solution for consumers by offering a dry-cleaning service, electrical goods or clothing.

There is also the potential for many continental European retailers to expand their stock of private labels to drive gross margins. Average private label penetration is set to increase across Europe from an average of 18.4 per cent to 28 per cent over the next two years, according to Datamonitor’s latest industry opinion survey.

Together, private label and portfolio diversification provide lucrative areas to exploit. As private labels are already well established in the UK, there will be a need to reassess the private label strategy on a category by category basis.

Because more consumers are adopting “on-the-go” lifestyles and the traditional nuclear family is no longer the norm, there is a growing trend for “top-up” shopping, and those retailers which innovate with formats to meet consumers’ changing needs will be the ones most likely to survive.

Convenience operators and forecourts are increasing the size and number of their outlets in order to exploit this growth. This is a major trend in the UK and across Europe.

In addition to increasing store sizes, convenience operators are organising layouts according to the type of purchase. For example, retailers are organising according to whether the consumer is making a top-up purchase or is looking for a meal solution.

But the key to successful format innovation is the creation of “value for time” for consumers. The concept is based on the fact that consumers make a purchase for a specific reason and that stores should be designed accordingly.

As a result of designing a store on this basis, consumers get the maximum value for the time that they have spent in store. For example, for the convenience channel, the in-store experience should be focused on making the purchase as quickly as possible.

Large supermarkets can maximise “value for time” both by making the shopping environment more enjoyable – for example by including cafés – and by creating in-store theatre from the use of in-store chefs.

There are many opportunities that retailers can exploit. However, the big players have the scale and financial resources to make major investments in these potential areas of growth, meaning they are best placed to exploit this potential. Smaller retailers would do well, therefore, to decide their strategy early, and maximise their potential through first mover advantage.

Factfile is edited by Julia Day. Datamonitor analyst Piers Berezai contributed