UK Grocers: food providing fuel for growth

Asda has become the latest grocer to announce ambitious expansion plans, in yet another indication that food &grocery is proving much more resilient to the recession than other retail sectors. Indeed, the robustness of the sector is set to provide grocery retailers with the opportunity to buck the trend of the deteriorating wider market and continue to grow through the downturn.

Food will be one of the fastest growing retail sectors in 2009

Verdict predicts that the food &grocery sector will grow by 3.1% in 2009, against a 0.6% decline across the retail market as a whole. “Inflation driving higher prices, the fact food is an essential purchase and more consumers eating at home, have all boded well for the market,” says Matthew Piner, Analyst at Verdict. “Moreover, food is the one area in which shoppers are likely to continue permitting themselves the occasional, more expensive ‘treat’.”

This trend is likely to continue, even as inflation, the main driver of growth in 2008, lessens. Cost prices are continuing to fall and aggressive competition between the grocers is leading to discounting, promotions and price cutting. “The considerable restrictions on supply which drove the massive inflation of 2008 are highly unlikely to be repeated this year,” says Piner. That said, upward pressures on price remain. The weak sterling will eventually begin to push up the cost of imported goods, whereas supply of some items, such as cocoa, oils and fats, remains fairly constrained. Moreover, growth in worldwide demand for meat and dairy continues to outstrip growth in supply.”

Grocers set to capitalise

Positive results from the major grocery retailers, driven largely by the buoyant food market, has seen ambitious expansion plans unveiled across the board, in a marked contrast with other retail sectors – which are seeing retailers falter, downsize and exit the market. Asda has today announced plans to create almost 7,000 new jobs in 2009. Sainsbury’s has announced its intention to create between 3,000 – 4,000 jobs next year, as it expands its floor space by around three to four per cent. Morrisons is to create 5,000 new jobs, as part of its target of increasing selling space by one million square feet over three years. Even Tesco, which has seen sales growth slump recently, is planning to add another 200 stores to its massive portfolio, creating up to 10,000 positions.

Moreover, smaller grocers with strong value credentials are also continuing to expand on the back of recent successes. Frozen food specialist Iceland is aiming to capitalise on strong growth in demand for cheaper, frozen goods, with its purchase of 51 new stores from the administrators of collapsed retailer Woolworths likely to create an additional 2,500 jobs. The discounters will also continue to expand this year, continuing the momentum they enjoyed in 2008. Although the low-cost operations of these retailers will mean them adding less staff, Lidl is planning more than 50 new stores in 2009, compared with 49 in 2008 and Aldi is likely to at least match the 41 stores it opened last year.

At the premium end of the market, Waitrose is also planning significant expansion, in spite of inconsistent sales throughout 2008. 2,250 jobs will be created in stores, including a substantial proportion across nine new outlets. Moreover, the retailer has also purchased 13 stores from the Co-operative Group following its acquisition of Somerfield, and aims to boost staff numbers at these outlets significantly. On top of these roles a further 250 positions will be created across the support functions, such as the distribution, warehouse and call centre operations.

Opportunity in adversity

Ultimately the grocers are gearing up to take advantage of impending opportunities in the retail market in a way other operators are unable to do. For the likes of Asda, who have previously been unable to compete with the huge land banks of Tesco, the playing field is becoming much more level. The failures of the likes of Woolworths, Land of Leather and MFI are already beginning to create a glut of potential stores sites, both on high streets and out-of-town. Although not all of it will be suitable and planning permission will continue to impose restrictions, the fact remains there are more opportunities, cheaper sites and a greater abundance of workers than there were a few years ago.

Therefore, it is no surprise to hear the major grocers gearing up to capitalise on these opportunities and the buoyant performance of the food market. “For the likes of Asda, expansion is becoming not only a sensible move, but an essential one in order to avoid losing ground to competitors,” adds Piner. “The convenience-driven nature of food shopping makes store penetration a huge factor and well-located stores, established now, will continue to trade strongly long after the recession is over.”

Moreover, there are increasingly opportunities to capitalise on non-food sales, leveraging value credentials to take advantage of budget-hunting shoppers looking to cut back on the frequency of shopping trips. “As the retail market deteriorates further there will be opportunities for those in the right positions – and the grocers are first in line to capitalise,” concludes Piner.