Five theses about the future direction of retail

The FMCG/Retail sector is in a phase of transformation, the like of which we have not seen before. Business stakeholders drive some of the changes, others are clearly coming from the outside. Business models nimble enough to adapt will thrive, while many others will be caught flatfooted and perish. We will look at shopper, retailer and FMCG manufacturer changes to gain a glimpse into a possible future.

Five theses for the future of retail:

(1) The age of store based foreign expansion is over.

(2) The discounters will become the biggest retailers in the EU.

(3) Vertical integration in grocery will continue.

(4) Convenience, fresh and foodservice will outperform

(5) Digitalisation/innovation: logistics, loyalty and in store

(1)

In grocery retailing the age of store based foreign expansion is over- with the exception of Aldi and Lidl.

In general it is very costly to establish a new grocery player in any market. Businesses need to find the right sites for stores and warehouses, they have to obtain the permits and licences. They have to hire staff and negotiate supplier relationships, build up a customer base and their brand. Often scale and efficiency gains are much harder to realise than expected. Moreover, it is very hard for new market entrants to become one of the leading national players. Usually, these positions are already taken and the players well established. And, finally what works in one country doesn’t necessarily travel that well to another.

This doesn’t mean that for grocers a retreat behind national borders or to existing markets is on the cards. It just means that most future foreign expansion will not be stores based. Instead it will be online and through partnerships (Amazon/licencing deals with Ocado).

(2)

The discounters will become the biggest retailers by sales in the EU. Schwarz Gruppe, Lidl’s parent, is already the number 1 in the EU. Total turnover including Kaufland reached €96.9bn (+7.4%) in 2017 (YE Feb 2018). Of this €74.6bn was generated byLidl. For comparison, Carrefour 2017 sales stood at €88.2bn (EU and ROW), with the retailer struggling for growth. Aldi sales were not far behind. Tesco with £51bn in global sales 2017/8 meanwhile has slipped down the ranks.

Aldi will easily overtake Carrefour in the next decade. On a global scale eventually Kroger (2017: $122.7bn), the US number two behind Walmart (leaving Costco aside), is in its sights too.

We have written elsewhere about the reasons behind their phenomenal success. That said, one of drivers is the relentlessly optimised and highly efficient supply chain, driving high volumes of single SKUs. And this in turn is based increasingly more on a vertical integration strategy.

(3)

Recent moves to vertically integrate in grocery retailing will continue. The advantages of doing so are numerous. They include complete control over new product developments from timing to production runs. Equally important are security of supply (great for OSA and forecasting), quality control and traceability. Usually a vertical integration strategy is better in terms of costs too, as it cuts out various middle men.

And taking into account a darkening outlook for frictionless global trade streams, a vertical integration strategy looks even more promising.

The discounters (with Mercadona being a prime example) have been at the forefront of this development. Now Tesco has followed suit in the UK with the recent Booker acquisition.

(4)

The winning strategies in grocery will focus on convenience, fresh and foodservice. While convenience is booming across the globe, the importance of fresh can not be understated. High standards in the fresh proposition will attract shoppers and act as the best defence against online. But there are clear cost implications, for one there is the high cost of replenishment, as fresh produce turns quickly. Fresh drives up costs in OSA and waste.

The other winning strategy to attract footfall is foodservice and to create an in store fusion of foodservice and retail. Eataly is executing this strategy perfectly.

This food service influence is also reflected in format development. In many inner cities shoppers will find various new food hall concepts and street food pop up events (such as London Union, or Time Out Markets).

Though eataly’s latest flagship, a “Disneyland” of food in Bologna provides an exception to the rule, out of town for food retail is mature and declining. It is not the format of choice any more.

(5)

Much of the digitalisation and innovation efforts in retail will center on logistics, loyalty and in store experiences. Innovations in logistics (driverless vehicles, drones, electric) will happen between stores and warehouses. But they will also affect last mile deliveries to the consumer. Another kind of innovation will focus on loyalty schemes (Amazon Prime) and the move to voice (Alexa, smart home). And staying with Amazon the trend towards “just walk out” technology will give a further impetus to new store formats and developments.

First published on: http://www.retailinsider.com/2018/07/five-theses-about-the-future-direction-of-grocery-retailing.html