EOTHO – did we eat out and did it help out?
COVID-19 Market Update – 04/09/2020
10 minutes to read
Introduction
This is the 18th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores two key themes:
- The impact of the ‘Eat Out to Help Out’ Scheme
- Ocado – goodbye Waitrose, hello M&S
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• 84,700 hospitality venues signed up for EOTHO scheme
• 130k claims to date on 100 million+ meals served
• 52% of consumers had a sit down meal/drink in Aug
• Ca. 35% of consumers took advantage of EOTHO scheme
• 25% of consumers had a sit down meal/drink in a pub in Aug
• 29% of consumers had a sit down meal/drink in a restaurant
• 67% of 16-24 year olds versus just 46% of 45-64 year olds
• Projected cost to Treasury of £522m (and rising)
• Some operators extending scheme off their own bat (and margin)
• Some doing so for sound reasons, others more in desperation
• Town centre footfall increases +21.1% week-on-week
• But footfall is still down -21.3% year-on-year
• Ocado’s tie-up with M&S formally launches
• Question marks linger over the strategic value for M&S
• Profitability could be undermined for the sake of market share
• £750m remains a hefty price to pay for a dubious privilege.
1. The impact of the ‘Eat Out to Help Out’ Scheme
Rishi Sunak’s ‘Eat Out to Help Out’ scheme came to an end on Monday 31 Aug and has widely been perceived to have been a success. Certainly, the initial headline numbers support this view. The 84,700 hospitality venues that signed up to the scheme have lodged ca. 130,000 claims, covering over 100 million meals – notionally, the equivalent of more than one for every person in the UK.
Three weeks into the scheme, the ultimate cost to The Treasury was projected to be around £485m. A surge in the final week saw this figure upgraded to £522m. Ultimately, it is likely to be significantly higher as hospitality operators have until the end of this month to submit claims.
Big numbers, but was it really a success? This is far more difficult to measure, certainly without recourse to the two fundamental aims of the scheme in the first place. 1. To provide an incentive to hospitality operators to re-open their doors post lockdown, something that many were being slow to do. 2. To provide an incentive to consumers to visit hospitality venues and be reassured that they are able to operate safely under strict socially-distanced conditions.
Market research conducted by Lightspeed on behalf of Mintel gives a more revealing, but also more nuanced view of the level of consumer take-up of the scheme. As of the third week of the month, 52% of consumers had partaken in a sit-down meal/drink in some hospitality establishment or another. Turning that on its head, 48% of people didn’t have a sit-down meal or drink despite the incentives on offer.
In terms of hospitality establishments used, just 25% of people (24% male, 26% female) had had a sit-down meal or drink in a pub/bar, rising to 29% (27% male, 30% female) in a restaurant, with a further 19% in a café/coffee shop. Gender skews were fairly minor, but age-based ones were more pronounced: 67% of 16-24 year olds and 62% of 25-34 year olds had a sit-down meal/drink, compared to just 46% of 45-64 year olds and 42% of those in the 65+ age bracket. A clear reflection of which consumer groups feel more comfortable returning to hospitality venues.
Of those that had a sit down meal or drink, 33% did not take advantage of the ‘EOTHO’ scheme. So, by crude mathematics, this implies that around 35% of the population had used the scheme by the third week of the month, in some shape or form. Clearly, many took advantage multiple times. Of those that partook, 19% had used it 3-4 times and 5% five times or more.
The numbers aside, many hospitality operators anecdotally seemed happy with the level of return. For many it was a relief just to see cash returning to the till, while also providing reassurance/proof that they were able to operate safely under enforced social-distancing compromises. To be up and running again, seeing customers return and at somebody else’s expense, most hospitality operators would appear happy at the general outcome.
Has ‘EATHO’ had a positive impact on the retail sector and high streets generally? This is far more difficult to gauge. Footfall has shown a gradually improving trend since lockdown was lifted and according to Springboard, was up +21.1% week-on-week to Wednesday 26 Aug. But is still down -21.3% on a year ago. ‘EOTHO’ has been helpful in driving footfall, but it hasn’t returned it to ‘normalised’ levels.
As I always argue, footfall is one thing, spend another matter entirely, the two often not correlating. We won’t get the official ONS retail sales figures (which do not include hospitality expenditure) for Aug until 18 Sep. If anything, ‘EOTHO’ success may have a negative impact on retail sales, particularly if it depresses grocery spending (which has almost single-handedly kept retail sales alive for the past 6 months). I personally expect it to have prompted a deceleration in grocery spending growth, but this will remain in fairly positive territory (+2-3% y-o-y) nonetheless.
Where do we go from here? Some hospitality operators have already pledged to continue the scheme into September and possibly beyond. Great for consumers, but a high risk strategy for the operators themselves. Consumers themselves may not be able to discern any change, but for the operators, having the saving subsidized by the government is a massive difference to taking the gross margin hit themselves.
Those opting to run the scheme under their own steam are effectively running a fairly aggressive promotion. In retail and hospitality, a promotion is only as good as the spin-off trade it generates. A family of four meticulously ordering food and non-alcoholic drinks to the exact tune of £80 (or worse still, even less) to max out their £40 saving are going to severely impact on that operator’s gross margin. But a couple freely spending £100+ on food and alcohol and securing a more modest saving of £20 may make the promotion worthwhile.
Retail and hospitality are all about giving the consumer what they want, but doing so in a way that makes money. A pub giving away free beer will be very popular and enjoy huge footfall, but it will neither make any money nor last very long. Achieving the right balance between keeping the customer satisfied and achieving a profitable return are the very tenets of the retailing and hospitality industries. Extending ‘EOTHO’ is an opportunity to build momentum for better operators, but possibly more a sign of desperation for others.
And taking a more holistic, if slightly more depressing view, there is also the matter of the £522m hit to the Treasury coffers and how ultimately taxpaying Peter will be robbed to pay fill-your-boots Paul…
2. Ocado – goodbye Waitrose, hello M&S
This week also saw the end of one beautiful relationship and the start of another. Waitrose’s long-standing collaboration with Ocado finally lapsed, with Marks & Spencer stepping into the breach, thereby making its maiden foray into the world of online grocery.
Media coverage of the transition has been curious, not helped by very suspect views of other, self-appointed “retail experts”. Waitrose has been widely depicted as the loser in all this, while this is seen as something of a coup for M&S. The few dissenting voices to this narrative struck a far greater chord with me personally.
Firstly, Waitrose hasn’t been left out in the cold, it has terminated its relationship with Ocado of its own volition. The John Lewis Partnership has been affiliated with Ocado since the very first year of its inception (2000) and initially had a substantial (29%) stake in what was effectively a joint-venture. This shareholding transferred into its staff pension fund in 2008 and in 2010, the John Lewis Partnership entered into a 10-year branding and supply agreement with Ocado. The Partnership would have had the option to renew or extend this agreement, but opted not to.
Presumably, the John Lewis Partnership could have bought out the joint venture at any point in the past. Given the rollercoaster ride Ocado’s share price has undergone over the years, it could potentially have made a financial killing, buying it for a song compared to its current market cap. of ca. £17bn+. But strategically, it went down a different route, effectively going it alone with Waitrose.com.
Whether John Lewis did the right thing financially by not acquiring Ocado outright in the dim and distant past in now a moot point – hindsight is a wonderful thing. But there is little question that it is now doing the right thing strategically, namely devoting all its energy and investment into Waitrose.com. There is little merit in continuing to supply a third party, who in many ways is effectively a competitor.
Conversely, M&S filling the void is widely being heralded as a triumph, for many an overdue foray into the high growth area of online grocery, in partnership with arguably the best-in-class online food operator. I am one of only a few that seems to question this logic.
As I’ve covered in depth in previous notes, the economics of online grocery are very complex and fundamentally, there are question marks as to whether it can ever be profitable. Great an operator as Ocado is, it has never turned a profit just by selling food online. The Big 4 multi-channel operators can only make it profitable by leveraging their store estates and selectively reallocating costs away from their online businesses.
Much has been made of the fact that COVID-19 has provided an unprecedented fillip to online grocery – perhaps too much. Online’s penetration of the grocery market has increased from 6% to 14% during the pandemic, but is now receding rather than kicking on from there. Make no mistake, it is still a growth market, but as things gradually return to normal, the trajectory will be far more measured than we have seen this year. And the question marks over profitability remain unanswered.
Put simply, Marks & Spencer does not need to enter the online food arena. It smacks of a bandwagon jumping exercise, a move to tick a box and keep up with the Jones’. If the rationale is to gain market share rather than protect profitability, surely if we have learnt anything in retail over the last 10 years it is that biggest isn’t necessarily best. Why sacrifice profitability for scale?
The crux of the matter is that M&S already has an tremendous food business and should stick to what it does better than others, rather than try and be like others. I haven’t even mentioned the very full price it is paying – a huge £750m for a 50% stake in the retail side of Ocado. £750m seems an awful lot to be paying for the dubious privilege of compromising one of the areas of the business that is extremely robust and by all accounts, still performing well.
Of course, the consumer is largely oblivious to most of these issues. Ocado shoppers up in arms at losing access to Waitrose products can simply defect to Waitrose.com. A cursory look on the BBC website and peruse of the ‘Have Your Says’ has the usual moans about missed delivery slots and substituted items. Particularly revealing was a “retail expert” reveling in the fact that she received two £5 vouchers for items cancelled, completely underlining the tenuous grasp of the financial dynamics of online grocery many people have.
But in retail and hospitality, the customer is king. And always will be. But the proverbial pub giving away free beer will please the customer, but go out of business very quickly. Striking the right balance between the two is a challenge at the best of times – and no more so than in the world of online grocery.
Stephen Springham
Partner – Head of Retail Research
+44 20 7861 1236
stephen.springham@knightfrank.com