According to a recent report by Verdict Research, our non-food spending has increased by 53 per cent since 1998, whereas the uplift in household grocery spending has been a rather more leisurely 13 per cent over the same period.
Could this trend, paradoxically, be connected with the recent dismal performance of Boots, the market-shaking disappointment with M&S’s clothing sales and, only this week, a pre-emptive bid for WH Smith by private equity firm Permira? Indeed it could, the strongest connecting links being the insatiable ambition and unbeatable marketing skills of Tesco, Asda and their like.
Who can blame the leading grocers for going where the money is? At the moment they account, individually, for only a small percentage of this burgeoning £111.3bn market (which in Verdict’s analysis excludes such non-food items as cleaning, petcare, tobacco, petrol, DIY, furniture and floorcoverings). But then again, this is a highly fragmented sector and it’s the comparative figures that are worrying for traditional non-food retailers. Tesco is already third with a 3.6 per cent share, chasing M&S’s 3.9 and not that far behind Dixon’s leading 4.2 per cent. Asda, with three per cent, is ahead of Argos and not far behind fourth-placed Boots, with 3.3 per cent.
Verdict reckons it is only a matter of time (five years) before Tesco, now clocking up profits of about £55 a second, assumes pole position, a thought unthinkable five year ago. Part of its confidence in making this prediction rests on what might be called the grocers’ momentum investment programme. Using the leverage of successful grocery sales, they have branched out into non-foods. Higher margins in non-food sales are then used to drive food prices ever lower, further increasing the number of customers. These food shoppers may in turn choose to buy into an ever-widening (and decreasingly expensive) range of non-food products.
There are, of course, limits to the virtues of this upward profits circle, chief among them property planning and competition constraints. But these should be of little comfort to yesteryear’s high street stalwarts, which have often displayed a lamentable complacency towards the new competition matched only by their lack of strategic vision. How else explain, to pick the most conspicuous example, WH Smith’s high visibility failure on all three of its major fronts – books, records and stationery – in so short a time? The trouble is, that time has now run out. Permira’s knock-out £940m ‘offer’ probably means new chief executive Kate Swann’s entrepreneurial mettle will never be tested; and that WH Smith’s most likely fate is break-up. Boots beware.
The real lesson to be drawn from the behaviour of these high street behemoths is about the difficulty of regaining the initiative once sales momentum has been lost. There are tangible weaknesses in the supermarkets’ non-food strategy which detract from their strong price appeal; product display and customer service, for instance. But the ingrained culture of their traditional competition makes a forceful challenge unlikely. That is much more likely to originate with a specialist retailer of the Carphones Warehouse variety.
Stuart Smith, EditorGeorge Pitcher, page 27