Retail and F&B – two steps forward and one back
COVID-19 Market Update – 16/10/2020
10 minutes to read
Introduction
After a workload- and annual leave-enforced break of nearly a month, this is the 21st 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:
- A temperature check on the consumer as the run up to Xmas starts
- The implications of Asda’s change of ownership
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
•Total retail sales up by +5.6% y-o-y in Sep
•‘Best’ monthly performance since Dec 2009
•But figures flattered by weak comparison base
•Grocery +5.6% (+5.1% like-for-like)
•Strong growth in home-related goods
•Deceleration in online growth to +36.7%
•Retail sales outperforming overall consumer spending
•Retail spend will defy macro-economic conditions
•Christmas will happen, but the figures may be deceptive
•High St in crisis-management mode for many months to come
•Asda acquired by EG Group for £6.8bn
•Unlikely to prompt significant strategic change/disruption
•Sale & leasebacks likely to be very limited
•Synergy will focus on ‘Asda on the Move’ petrol forecourts
•CMA will focus more on fuel (competition + pricing) rather than food.
1. A temperature check on the consumer as the run up to Xmas starts
Six months on from the initial full lockdown and as we enter a new phase of restrictive measures, what is the state of mind of the UK consumer? In defiance of many barometers that supposedly dictate consumer behaviour, actual retail spending patterns are actually more encouraging than we may have expected. Playing off the latest BRC and Barclaycard figures against each other gives both a consistent and contrasting picture.
According to the BRC, total retail sales grew by +5.6% in September, or by +6.1% on a like-for-like basis. Note that these are meaningful year-on-year comparisons, as opposed to spurious month-on-month trends which the ONS major on and economists read far too much into (for unfathomable reasons). Not a time for hyperbole, but nevertheless, this represented the “best” monthly performance since December 2009.
But performance between sub-sectors remains hugely polarised. Grocery sales grew by +5.6% (+5.1% like-for-like), no doubt boosted by a fresh wave of stockpiling by some consumers and reflecting a partial bounceback from EOTHO in August. Home based categories such as electronics and household goods also showed decent growth.
But the BRC is (rightly) at pains to point out that the recovery seen since lockdown was lifted by no means offsets / counterbalances the sales lost in the early part of the year. In the three months to Sep, total instore sales of non-food declined by -12.3%, better than both the 6 month (-29.6%) and 12 month (-18.8%) averages. An improving trend maybe, but still a long way from any sort of tangible recovery.
Online saw headline-grabbing growth of +36.7% in Sep, but the rate of growth is inevitably decelerating from artificial peaks when stores were closed (the three month average to Sep was +39.7%). By extension, online is showing significant month-on-month declines – presumably economists will take this on board in their analysis?
The monthly figures from Barclaycard provide an interesting counterpoint in that they refer to total consumer spending and include other expenditure categories outside retailing. According to Barclaycard, total consumer spending grew by a more modest +2.0% in Sep (with overall transactions +4.5%), the best monthly performance since Feb. “Essential Spend” (defined as essential travel, fuel, insurance and supermarkets) grew by +6.1%, with “Non Essential Spend” (everything else) ahead by a more measured +0.6%.
The individual sector breakdowns are far more revealing and show Retail spending (+19.6%) holding up far better than other sectors of the consumer economy, with Hospitality & Leisure down -28.3% and Other down -4.5%. Within the fine categories, a number of the retail segments showed very strong growth (consistent with the BRC, but at higher levels) including Grocery (+18.7%), Household Goods (+22.6%) and General Retailers (+30.1%). Even Clothing retailers saw growth, albeit more modest (+4.1%).
The non-retail categories are even more of a mixed bag. Spend on Digital Content and Subscriptions (+24.2%), Pubs/Bars (+9.0%), Takeaways/Fast Food (+25.8%) showed strong growth, but Restaurants had a tough month (-18.7%). The really nasty numbers were in Entertainment (-36.4%), Hotels/Resorts/Accommodation (-18.9%) and Travel (-63.1%). Some spend that would otherwise have been made in these categories is clearly transferring to Retail.
These differentials partially underline why retail sales perennially defy economic logic and why consumer confidence is often a poor indicator of actual consumer behaviour. Much of the economic narrative currently is of weak consumer confidence and a very challenged labour market in the face of an unwinding furlough scheme and rising unemployment – all of which is undeniable.
But it would be short-sighted to necessarily correlate these factors to weak retail sales – on the contrary, in times of hardship, consumers tend to prioritise retail spending over other expenditure categories. This has historically been the case in previous recessions and is likely to be repeated this time around and augurs fairly well for the coming months…
…which, of course, takes us into the festive season. Christmas this year will be harder to predict than ever (but I will put my head on the block in the coming weeks with our own forecasts and musings). But one thing to flag from the outset: the actual retail sales numbers may not reflect the reality of what is actually happening on the ground / in the high street and, more than ever, extreme caution is needed in interpreting them.
The numbers will inevitably be skewed by last year’s comparables. Suspiciously weak at the time, last year’s figures will make for very soft basis of comparison and make this year’s figures seem unrealistically good. To a degree, we are seeing this already in the BRC figures, with this September’s growth (+5.6% total, +6.1% like-for-like) leveraged off very soft comparables (-0.6% and -1.3%). The months to come are unlikely to prove any different – Oct 19 (+0.6% and +0.1%), Nov 19 (-4.4% and -4.9%), Dec 19 (+1.9% and +1.7%).
Ironically, a relatively benign Christmas last year was erroneously labelled a disaster on the back of suspiciously weak numbers. But it would be equally wrong to declare an infinitely more challenging retail landscape this Christmas as a triumph on the back of seemingly strong figures.
2. The implications of Asda’s change of ownership
After months of speculation, Asda has finally been sold to a consortium led by the Issa Brothers, owners of petrol forecourt firm EG Group, and TDR Capital for £6.8bn. Walmart has retained an undisclosed minority stake and a seat on the Asda board. The sale comes more than a year after Asda’s proposed £12 billion merger with Sainsbury’s was unceremoniously blocked by competition regulators at the CMA.
Walmart originally taking over Asda in July 1999 (for £6.7bn) was something of a “Kennedy moment” for the retail analyst community (surpassed only in recent times by the collapse of Woolworths) in that it was supposed to herald a complete revolution in the UK retail market. It seems curious that this deal, equal in magnitude and to a degree significance (the world’s largest retailer by a country mile offloading its largest international business) has barely registered on the richter scale.
In essence, the deal is unlikely to be massively gamechanging for Asda itself, nor hugely disruptive for the UK grocery industry as a whole. But that is by no means a bad thing for either. Asda will continue to be led by current chief executive Roger Burnley and the existing management team and is unlikely to chart a radically new strategic course.
What may seem a surprising match-up on paper is less so in practice. There are two sides to the new ownership, the Issa brothers, who are fronting the deal, and the private equity backing from TDR Capital. Moshin and Zuber Issa found initial success through Euro Garages before merging this chain with the TDR-owned European Forecourt Retail Group to create EG Group.
Whilst the majority of the EG Group’s €20 billion revenue comes from fuel, the group also turns over €2.8 billion in grocery and general merchandise sales, with Euro Garages accounting for around £230m – enough to put it in the top 30 of UK grocers according to Mintel.
In an interview with Retail Week, Asda’s CFO Rob McWilliam stressed, in no uncertain terms, that “this was not a traditional private equity deal”. By extension, there is unlikely to be a slash and burn mentality and huge asset stripping process.
We would speculate that a proportion of Asda’s vast property portfolio may come to the market via sale and leaseback, but this is likely to be very limited. A less scrupulous PE house would inevitably be far more ruthless in selling the business’ stores – good news for the real estate community, but in all honesty, far more damaging to Asda as a business in the longer term. My investment agent colleagues may not agree, but a wholesale sale and leaseback programme is not in the business’ long term interests.
In terms of ‘quick wins’, Asda is likely to take over supply and operation of the foodstores on EG’s petrol forecourts and these may well be branded as ‘Asda on the Move’. But even this is not without certain complications, particularly in terms of price points. Other mainstream grocery operators (e.g Tesco, Sainsbury’s, M&S) operate variable pricing models, with their respective forecourt stores typically commanding a price premium. As an EDLP (Everyday Low Prices) operator, Asda has less wriggle room in terms of pricing and this will be a key challenge to overcome.
Will this herald a major assault on the convenience market by Asda, as many are predicting? I am not convinced, for a number of reasons. Asda is a relative novice in c-store retailing. Its smallest stores (Asda Supermarkets) average ca. 15k – 20k and are largely legacy Netto stores it acquired in 2010. Its previous c-store trial (Asda Essentials) was quickly aborted back in 2007. Asda on the Move is a completely new format that has only recently been launched in three trial locations, all petrol forecourts.
Petrol forecourts aside, c-store retailing may still prove a bridge too far for Asda. Other commentators may point to the fact that convenience is a faster growing channel than ‘big box’ foodstore retailing and that Asda’s lack of presence in the c-store arena is a strategic weakness. But c-store retailing is also a very distinct market in its own right, requiring a completely different model and execution skillset. And profitability is far more hit-and-miss.
It is also highly competitive and the likes of Tesco, Sainsbury’s, M&S and the Coop have been scouring the market for sites for years. To enter the market organically from scratch would be a huge (and costly) strategic challenge. Morrison’s tried and failed with M-Local on the very same basis.
And, of course, the deal is still subject to regulatory approval and is not expected to complete until the first half of 2021. And as Asda learned in its dealings with Sainsbury’s, the CMA moves in very mysterious (if not to say downright baffling) ways.
Second-guessing the CMA is a fool’s errand, but here goes: I would expect the main focus of their enquiry to be on the fuel, rather than food side of the business. And possibly with two strands: firstly, ensuring there is sufficient competition from petrol forecourts in all cross-over locations and secondly, ensuring that Asda’s low pricing stance on fuel is maintained and that there is not be upwards pricing pressure. The CMA is unlikely to block the deal outright, but may stipulate some forecourt disposals in certain locations and assurances on low pricing.
Of course, the bigger picture here is of Asda returning to UK ownership for first time in over 20 years. Walmart taking a check on its global aspirations, just as its multi-national counterparts Tesco and Carrefour have done in recent years. Not an end to internationalisation in retail per se, but a timely reminder that domestic markets are always the priority, scale is no longer the be-all and end-all in retail and biggest is not necessarily always best.