Retailing in the Week Ahead, Week 5, 2019
I’m already feeling a little bit winded, are you too? Retailer results for 2018 keep pouring in, leaving tea leaves to sift through in figuring out what 2019 and 2020 might shape up to become. The number of big headline game-changing announcements arriving by the minute is coming at such a pace it is hard to keep up. But this is a marathon and not a sprint. So sometimes it is better to pause and take a water break. Where are we and what comes next?
Let me share a few observations on what we’ve learned so far. 2019 is fast becoming an inflection point year. By inflection point, I mean a moment where a retail channel goes from rapid growth for all operators in the channel to a period where some fail to deliver growth and others even drop out altogether by shutting down or being acquired.
For many years at Kantar Consulting we’ve described these fast-growth channels as ‘Growth from Uncomfortable Places’ – eCommerce/Online Grocery, Discounters/Discount Supermarkets, and Convenience Grocery (Proximity Grocery). Over the past five years or so, European retailers with a strong footing in these channels were able to outgrow competitors in other channels. However, will that continue to be the case? Might we now start seeing scenarios where those champions of the past five years decide to jump ship as attaining growth becomes more complex and less assured.
Lidl fails in Norway; Ocado considers its future; Franprix struggles for growth - all signifiers of potential inflection points (Source: Axel1, Ocado, Casino)
Let’s consider each channel, one by one, with examples emerging from the 2018/2019 results season which might leave us wondering how much fuel is left in the tank for these fast-growth channels of the past five years.
There are two myths about discounters that need correcting. The first is that discounters never fail when they enter a new country. The second is that discounters run the most profitable formats in retail.
The reality is very different. Lidl was forced to pull out of Norway encountering harsh competition in Europe’s most affluent country as measured by GDP per capita. On the opposite side of the wealth spectrum, Aldi exited Greece during the early stages of the Greek financial crisis for similar reasons.
So where is the inflection point? On 20 December, German trade publication Manager Magazin reported that Aldi Nord Germany had incurred its first operating loss in the company’s history. The overall group will only see a profit because of returns coming from other markets.
What does it mean? Discounters, long immune to the new forms of competition coming from the digital age, the age of agile working and the gig economy, may not always secure a path to growth. A-Brand suppliers should use caution when listing brands at discounters in desperate need of clawing their way back to profitability.
Likewise, two myths about convenience supermarkets also need correcting. One is that small-format supermarkets outperform large-format stores; the other is that franchising does not require ongoing re-investments of large magnitude.
For the first time in recent memory, two French retailers reporting results last week demonstrated the dangers of embracing these two myths. Carrefour, which has rapidly embraced proximity retailing in almost every country of operation, is facing an uphill challenge to deliver top line growth in three core European countries – Italy, Spain and Belgium – despite heavy investments in proximity stores. Likewise, Casino Group’s Franprix proximity business unit struggled heavily in Q4 2018 because of lower tourist traffic to Paris, among other reasons.
So where is the inflection point? Companies like Eurocash in Poland and Alimentation Couche-Tard (best-known for Circle K) in the Nordics continue to deliver stunning top line results. However, Eurocash’s bottom line growth has not matched its top line. Not all proximity operators are able to keep up and the number of available ‘independent’ proximity store owners will soon become a major issue in many countries. 2019 will usher in a wave of new investments in proximity stores and not all retailers will be able to stay in the race.
So what does it mean? Proximity grocery, particularly posited around franchise arrangements with independent grocery store owners, will no longer provide universal growth. These stores, which got huge capital injections some years back to upgrade look and feel as well as marketing, now look in need of substantial remodeling CapEx to remain relevant. Not all parent companies have the required capital for this infusion, leaving the situation precarious. A-Brand suppliers should be exercise considerable caution when investing with multi-format retailers, especially if the business’ proximity grocery side is suffering investment shortfalls and stronger competition in key markets.
Finally, two online grocery myths have persisted that need correcting. These are that (1) success is all about last-mile profitability, and (2) that consumers want to shop big baskets online.
News in the UK press that Ocado’s may sell its grocery home delivery business to rival Marks & Spencer underlines the challenges with both philosophies. On paper, Ocado has the most profitable last-mile logistics of any UK grocery eCommerce specialist. Similarly, Ocado has the largest average basket per order of any major home delivery provider. Yet the company will potentially exit and focus instead on its Software-as-a-Service business opportunities.
So where is the inflection point? Tesco dropped its Tesco Direct business in July. Ocado is possibly exiting its grocery home delivery business in January. With these two giants in Europe’s largest grocery eCommerce businesses changing their approach to online services in dramatic fashion, we are likely to see a wave of more changes across online grocery in all corners of Europe.
So what does it mean? Online grocery, especially home delivery of large baskets, may have reached a plateau where further evolution is needed. Successful new startups demonstrate that the van delivery model is not the most efficient and, in cases where retailers have dropped minimum order size requirements, consumers have responded by purchasing much smaller baskets. A-Brand suppliers should work hard to understand what their online consumers actually want from a delivery platform when it comes to pack size and order frequency. Retailers not providing against consumer needs may need to realign quickly in the year 2019.
CONCLUSIONS FOR THE WEEK AHEAD
We will do our best to monitor retailer results as they come, fast and furious, over the next few weeks. As we do, we’ll be looking for more myth-busting information - usually buried in the small print of the press release. We hope you’ll keep in touch to find out what we learn and share your own questions and stories along the way. To learn more, tune in to Kantar Consulting’s 2019+ European Retail Outlook Webinar this week.
With that, as ever, we encourage you to click on links to some other great pieces of work we published on Retail IQ in Week 4:
In addition, if you get a chance, please share your thoughts or questions on ‘Three Inflections’, or any other topic. Good luck in the week ahead.
Ray Gaul – Ray.Gaul@KantarConsulting.com and @KantarConsulting or @RayGaul on Twitter plus LinkedIn.