Before dealing with e-commerce it is useful to provide a brief summary of the changing UK grocery market as a whole. The grocery retailer is defined as a merchant that primary sells food along with household and pet goods (Competition Commission, 2008). The modern supermarkets or superstores have been labelled as much more than just retailer opportunities: many scholars describe them as ‘retail theatres’ with ‘themed environments’, ‘fantasy urbanism’ and ‘Carnivalization’, where customers can shop, bank, be treated, dressed and socialise (Wrigley and Lowe 2002). Moreover, the UK grocery retail industry is an influential political and economic force, being the largest private sector employer and the largest manufacturing sector in the UK.
The grocery sector is the major contributor to the UK economy with over 50% of total retail expenditure being spent on groceries (IGD, 2016b). Analysts at the Institute of Grocery Distribution (IGD) forecast that by 2021 the UK grocery market will be worth £196.9 billion which is an increase of almost 10% compared to £179.2 billion grocery sales in 2016. However, when analysing the dynamics of the grocery sales over the last 5 years, from 2011 to 2016, the food industry can be seen to have experienced a continuous fall in annual growth rates from 4.7% in 2011 to 0.4% in 2015 (The National Farm Research Unit, 2014). The structure of the UK current grocery industry is represented in Figure 2.12.
Figure 2.12. The composition of the UK grocery sector: Source: IGD, 2016
The supermarkets dominate the market with almost 50% of all groceries purchased through this channel. The convenience stores are the second most popular channel with 21% of the share. Discounters and online channels have relatively low shares of 10% and 6% respectively. The IGD provides the following categorization of the UK grocery channels:
1. Hypermarkets. The largest type of grocery stores with the size of over 60,000 sq ft and an extensive range of food and non-food lines.
2. Supermarkets. Large grocery stores with extensive food lines and a small range of non-food goods, with a size of between 3,000 and 60,000 sq ft
3. Convenience stores (c-stores). Small grocery stores with the sales area of less than 3,000 sq ft with longer opening hours offering at least seven product categories but limited household goods
4. Limited Assortments Discounters (LAD) or Discounters. High street or out of town retailers selling groceries at lower prices compared to the major food supermarket chains. Examples - German based Lidl and Aldi, Poundland and B&M.
5. Other retailers. High street small retailers with less than 3,000 sq ft sales area including newsagents, off licenses, bakeries and department stores selling food as a side line of their predominantly non-food business orientation
16.5% 86.6% 37.5% 17.9% 10.5% 10% 0 10 20 30 40 50 60 70 80 90 100
6. Online. Groceries ordered online for home delivery or for pick up at the local supermarket, i.e. 'click and collect' service
Figure 2.13 shows changes in the grocery sector predicted for the next five years with a total market growth of over 23% by 2020. The highest growth is expected to be within convenience, discounters and online channels with superstores losing their market share by 2% by 2020.
Figure 2.13. Changes in the UK grocery industry 2015-2020. Source: IGD, 2016a The market is dominated by four leading supermarkets chain or the “big four” – Tesco, Morrisons, Asda and Sainsbury’s, collectively accounting for 70% of the market share and 60% of the total grocery floorspace (KantarWorldPanel, 2016; Hughes et al, 2009). Figure2.14 demonstrates the distribution of the grocery market among the UK’s leading grocery retailers with Tesco taking a substantial lead with 28% of market share followed by Sainsbury’s and Asda with the similar market shares of 16%. The discounters Aldi and Lidl have a combined share of 9% compared to one of the “big four” Morrisons at 11%.
Figure 2.14. Grocery Market Share 2015 Source: Kantar Worldpanel, 2016
Tesco has twice the floorspace compared to its closest rival Sainsbury’s, with an 11% advantage in market share. At the same time, Tesco’s operating margins of 6% are higher than average for an industry where 3.6% to 4.5% is the norm (Competition Commission, 2008).
The current structure of the grocery retailing started to develop in the 1950s with the shift from service to self-service and the growth of smaller supermarkets. In the 1970s and 1980s large, mainly out of towns supermarkets were built, with a small numbers of major retailers obtaining more e market share and consequently, declining numbers of the smaller independent stores (Competition Commission, 2008). From 1960 to 2000 the number of large and mid-sized grocery stores more than trebled from 2000 to 6300 stores. Between 2000 and 2007 the super large format supermarkets (with over 25000 sq ft) experienced an annual growth of 3% compared with 1% growth for smaller format stores. As a result of mergers, acquisitions, organic growth and ‘store wars’, the top five largest food retailers (Sainsbury, Tesco, Safeway, Asda, Somerfield) controlled over half of the whole retail market share at the end of 1990s. They became very powerful politically and economically in the UK. In the 1990s their power was threatened by increased market penetration from European ‘deep’ discounters retailers, e.g. Netto and Aldi rapidly expanding due to the limited discounted subsector
28% 17% 16% 5% 6% 11% 2% 5% 4% 3% 3% 0 5 10 15 20 25 30
present at that time in the UK (Kwik Save being the only major incumbent), and the low prices offered in times of intensifying recession. The market leaders were forced to reconsider their strategies and introduced ‘price fighter’ brands to be competitive and loyalty card schemes to retain customer loyalty. They recognised the consumer trend towards more frequent but smaller shopping baskets and moved into convenience market in the 2000s with Sainsbury’s purchasing the chain of Jackson’s stores in 2004 and Tesco’s acquisition of T&S small stores in 2002 (Seely, 2012). They repositioned the strategies, moved with demand and continued to be the market leaders (see Hood et al 2016 for more details)
The grocery industry is changing. The recent financial crises have made customers develop new habits, e.g. being more price conscious and shopping at alternative discount stores. Consequently, the big four’s profits are falling, with Sainsbury’s declaring in 2015 a pre-tax loss of £72mn, and Tesco of £6.4bn (The Telegraph, 2015). Furthermore, the heavy investments into large format grocery stores in order to expand their presence has resulted in seemingly underused floorspace across all “big four” supermarkets with profits falling per sq ft of grocery floorspace. For example, Sainsbury’s declared in 2016 one in four of their supermarkets to having space under- utilised, which totals to 6% of the total retail space. The supermarkets have increasingly recognised the problem and are now finding alternative ways to utilise the available space by offering more non-food product ranges and letting the empty areas to other shops. For example, the purchase of Argos by Sainsbury’s in 2016 allowed the first 10 Argos stores to be opened in Sainsbury’s supermarkets in 2016.
As with the retail market as a whole, the grocery market is becoming a very competitive environment with new technologies presenting new opportunities for businesses to enter the market. The existing market leaders have experienced further pressure from the development of new entrants to online retailing, i.e. Ocado, a pure e-retail grocery offer and Amazon using their existing online platform to compete with the traditional format grocery.