Much of the strategic thinking by the UK’s supermarkets has historically been predicated on price. Remember the recent baked bean, banana and milk wars that were all based on the desire of one operator to offer these core items at a cheaper price than their bitter rivals. This backdrop has meant that most UK supermarkets have initially entered the market with a lowprice, low-cost proposition. However, things are changing and we are now increasingly seeing the market move away from one that is highly price focused to one where price becomes less important and where product quality gains prominence. While there is no denying that the supermarkets will continue to sell serious volumes of ‘value’ lines there is increasing evidence to suggest that there are now growing numbers of consumers ready, willing and able to trade-up to more ‘aspirational’ and better quality products.
Trends refining the nation’s taste buds
This is based on various trends including increased affluence throughout the country, an ageing population, greater concern over food safety and traceability as well as greater interest in cooking (or at least watching cookery programmes on TV). Our changing food buying patterns undoubtedly helped prompt the recent demise of budget sandwich group Benjys. It falls into the hands of the administrators was put down to a failure to adapt to changing consumer patterns. While people have been trading up to more exotic fare from the likes of Pret a Manger and Marks & Spencer, Benjys has continued to sell traditional sandwiches such as ham and cheese in white bread. This trend has also fuelled the growth of upmarket grocer Waitrose, which has expanded into a national player. Over the past five years it has increased turnover by almost 70% to £3 billion – a faster rate than even the mighty Tesco. And the part Waitrose-owned online food company Ocado has also built its market share over recent years. Other upmarket players also prospering include M&S and its Simply Food outlets, Sainsbury’s and regional operator Booths. What will undoubtedly be a surprise to many people, both in the UK and elsewhere in Europe, is that McKinsey found that Britain has more of the consumer types who are most interested in food – termed ‘foodies’ – than other European countries. As many as 58% of the UK’s shoppers fall into this category compared with 44% in France and only 32% in Germany.
We’re demanding quality and prepared to pay
Among these people is the sub-category of ‘pure premium’ shoppers, who are willing to pay more for good quality food. They account for 31% of UK shoppers compared with a much lower 9% in both France and Germany. This tendency to spend more on food is undoubtedly part of
the reason why the UK has only a limited appetite for hard discount stores. They have only managed to achieve a 5% share of the UK market compared with a hefty 40% in Germany. It is interesting to note that Allegra Strategies predicts that such stores – that include Aldi, Lidl and Netto – will grow UK sales by 89% between 2005 and 2010 to £5.6 billion. But this is with an evolving model for the UK that involves a growing percentage of branded and ‘premium’ own label food products and not just value own label lines. Although branded goods from the likes of Heinz and Unilever etc… still represent a decent proportion of total supermarket sales (and have decent margins) it is own label premium goods that excite the grocers most as they give them their greatest margin opportunity.
The Institute of Grocery Distribution (IGD) estimates that the premium own label market in the UK is worth £5.5 billion within a total premium food market of £11.6 billion (this includes regionally sourced products and the organic market) – which represents 9.6% of the UK grocery sector.
Whole food/deli operations set to prosper
Proof that this market is growing can be seen from the size of the ranges now available at the major supermarkets. According to the IGD the Tesco Finest range now encompasses 1,300 lines – worth £480m per year, Sainsbury’s Taste the Difference has 850 lines – worth £370m, and Asda Extra Special has 725 lines – worth £90 million. That even the more resolutely price-driven retailers such as Morrison’s and Somerfield have been growing premium own label ranges is evidence of the public’s desire for such goods. The expansion of these own label ranges across all UK supermarkets has undoubtedly exposed premium products to a wider variety of demographics. What will no doubt have thrilled supermarket executives is the IGD finding that as many as 45% of consumers perceive premium products as affordable - even amongst the less affluent groups. It also found that the proportion of people purchasing premium products is evenly spread across social groupings: consider that at Tesco 64 per cent of shoppers purchase both its Finest and Value products. Although the UK’s supermarkets will be working hard to satisfy increasing demand for premium own label they will also have to fend off new competitors – from small delis to larger operators. The largest is US-based Whole Foods Market - that bought the UK chain Fresh & Wild - and is due to open a massive outlet in London next year. While this might represent a threat it also presents an opportunity as Whole Foods Market has been credited with changing the eating habits of a large proportion of US consumers. If it is able to do this in an already premium-receptive UK then the overall market for quality goods will grow even further and have all the supermarkets continuing to lick their lips at the prospect of yet even more juicy margins in the future.
Glynn Davis writes for The Grocer magazine, RetailWeek and several national newspapers. He is retail and leisure correspondent for The Fleet Street Letter.
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