If there's a market that's ripe for reinvention, it's UK food retail. Profits for the major operators are down by between 25% and 100% (in the case of market "leader" Tesco) in the last two years. This is mainly due to the growth of hard discounters, which still has a considerable way to run to match penetration levels in Europe. The shift to online ordering with home delivery, which now accounts for over 5% of UK grocery sales, has also started to impact profitability, with average service fees falling from £6 five years ago to £2 today as the space race shifts online. However, industry executives are too busy thinking how to stem the advance of the discounters to think about the implication of the growth of online. Unfortunately, this represents a much greater existential threat to their business than the growth of the likes of Aldi and Lidl.
For brick and mortar grocers, far more than for retailers of general merchandise, online adds considerable cost but usually little in the way of incremental sales. There are dis-economies of scale in fulfilment, as picking has to be taken out of stores to dedicated warehouses (aka cost centres) once online represents c10% of a store's sales. This implies significant deleverage of the grocer's fixed store costs. If nothing else changes, if/when home delivery reaches 15% of the UK market, sector profits will mechanically be around 40% lower than today's (already depressed) level. Closing stores might help, but is likely to be a messy, drawn out affair - what retailer wants to be the first to give up the other 85% of its sales to competitors?
When the going gets tough, most business leaders tend to batten down the hatches and become less rather than more open to new ideas. Like fighters, their vision narrows - just when it should be expanding to see the bigger picture. This tendency to look inwards instead of outwards helps explain why so few incumbent companies manage to adapt successfully to major changes in their industry. Reinvention usually happens from outside, not within - Apple's legendary revival being a rare exception.
True to form, the UK's major food retailers have reacted to an unprecedented pace of change by doing more of what they already know how to do - cutting prices and costs, "slim-lining decision-making processes", reining in capex and "refocusing on the basics". There has been some musical chairs in management, with former Tesco executives now heading up Morrison, the smallest of the "Big Four". To its credit, Tesco brought in a (semi) outsider as CEO, former Unilever executive Dave Lewis, as well as a new UK CEO with a track record of successful turnarounds in non-food retail and an encouraging penchant for treating staff as assets to be nurtured rather than costs to be cut.
With this in mind, the questions I would like to put up for discussion are:
1) What will it take for the management of UK food retailers to realise that this is an industry that requires true reinvention, rather than a narrow focus on what's gone before? The longer they wait, the tougher it will be to execute a meaningful change of course.
2) How relevant is this discussion for food retailers in Europe and the US, where the rapid growth of new online food hubs/aggregators/retailers suggests considerable pent-up demand, and the entry of fulfilment services such as Google Express is starting to lower the price of delivery?