Counting the Cost of COVID - or Online Growth?
COVID-19 Market Update – 30/04/2021
11 minutes to read
Introduction
This is the 39th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note focusses on two key themes:
- What we learned about the grocery market from the Kantar numbers
- Assessing Sainsbury’s / Argos performance in this wider context
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• UK grocery sales +5.7% in 12 weeks to 18 Apr
• Growth accelerates to +6.5% in April
• Growth achieved despite very demanding comp
• Trips to supermarkets increase +4% m-o-m
• Online’s share decreases to 13.9%
• Aldi makes first market share gains in a year
• Asda, Morrison’s and Tesco also increase share
• Sainsbury’s FY sales (exc fuel) +7.1%
• Grocery +7.8%, General Merchandise +8.3%
• Digital sales +102% to £12.1bn
• Online grocery +120%, 17% of food sales vs 8% last year
• Underlying profits down -39% to £356m
• COVID-related costs of £485m
• Statutory pre-tax loss of £261m
• Exceptional charges of £617m
• Question marks over some areas of strategy
1. What we learned on the grocery market from the Kantar release
Supposedly permanent consumer shifts on the back of COVID are already starting to unravel. The perennial pitfall of interpreting an enforced short-term change as a long term trend and definitive direction of travel. Figures on the UK grocery market this week from market research specialist Kantar certainly suggested something of a consumer U-turn, one that is likely to accelerate going forward.
The clear message from Kantar was that many customers who had been buying food online returned to supermarkets in April. As the UK’s vaccination programme continues to advance and in a month where non-essential retail reopened alongside pubs and restaurants with some restrictions, customer visits to supermarkets increased by +4% in April, according to the latest Kantar supermarket data.
As Kantar’s head of retail and consumer insight Fraser McKevitt poignantly observed: “There is a growing sense that the worst of the pandemic is behind us, and people are becoming more comfortable with venturing out to the supermarket. The past four weeks have been the busiest in store for the grocers in more than a year, as the number of trips made in April increased by 4% compared to March. With much of the over-65 community now vaccinated, older shoppers accounted for nearly half of the increased footfall.”
In comparison, the number of people shopping online for groceries fell for the second straight month, down to 13.9% from a previous high of 15.4% in February. McKevitt added that while online grocery shopping continues to grow, it has slowed significantly since the height of the crisis. “While online is still growing strongly, at 46%, the rate is half what it was at the height of the pandemic.”
The “official” retail sales figures from the ONS are also mirroring this trend, albeit with a month’s time lag and slightly lower metrics. According to the ONS, online grocery penetration declined by a further 20 bps in March to 11.7%, from a peak over ca. 14% during the height of the pandemic. A return to single digit penetration is conceivable in the months to come.
This shift back to stores was also manifest in Kantar’s accompanying market share figures. Aldi, which does not operate online, recorded its first growth in market share in a year. Aldi’s overall sales climbed +6.5% which saw its share increase from 7.8% to 8.0%. Fellow discounter Lidl saw its market share hold steady at 6.0%, on the back of a sales increase of +6.1%.
In terms of the ‘Big Four’, Asda was the fastest growing during the period for the first time in over two and a half years. It recorded a 40bps increase in market share to 14.8%, as sales jumped +8% during the reporting period. Tesco also marginally increased its market share 0.2 percentage points to 27.0%, Morrisons reported a 0.1 percentage point increase to 10.0%, while Sainsbury’s market share remained static at 15.3%.
In line with the wider slowdown in online shopping, Ocado’s overall sales growth slowed to +27%, although it is obviously still the fastest-growing grocer in the UK. Ocado’s share of the UK market stood at 1.8% in April, 40 bps higher than a year ago, but 20 bps lower than the 2.0% it achieved in Feb 2021.
Of all the figures in the Kantar release, perhaps the headline market growth figures were the most encouraging. Grocery sales for the 12 weeks to 18 April 2021 were up +5.7% year-on-year. Taking the month of April in isolation, sales growth accelerated to +6.5% year-on-year. These figures are exceptional in that they are against incredibly tough comparables, the equivalent period last year seeing grocery sales spike, partly on the back of shopper stockpiling.
But there is still an ‘artificial’ boost to the grocery sector in that the hospitality sector is still far from operating at full capacity. Only F&B facilities with outside space have been able to trade from 12 April, with restrictions on indoor areas only scheduled to be lifted from 17 May. An undoubted hospitality surge will ensue (with the weather playing a key part) and this will inevitably divert some spend away from supermarkets.
As Kantar observed: “While the market may fluctuate between growth and decline in the months ahead, depending on the year-on-year comparison being made, the fact that trip numbers are up and basket sizes down suggests that habits are slowly returning to normal”. Amen.
Is this the beginning of the end for online grocery? Of course not, but we will see a return to a more standard growth trajectory rather than temporary, highly artificial spikes. And with online grocery penetration settling back to more sustainable levels, simple mathematics dictate that online’s share of all retail sales will also recede pretty swiftly, the widely-cited 36% a mere high water mark.
But as with so many things in the retail sector, it is not just about the numbers. Online grocery has come of age over the last year and the grocers have all learned major lessons and in many ways, even surprised themselves. Questions will always remain re. profitability, but the key takeaway for the ‘Big Four’ especially is that they now have the know-how and capability to scale up / down their online grocery operations to meet demand, temporary, seasonal or otherwise, in a more cost-effective way than they could before.
2. Assessing Sainsbury’s / Argos performance in this wider context
A significant boost to sales, but only at the expense of higher costs. That has been the general narrative around foodstores over the course of the pandemic and was a clear message from both Tesco and Morrison’s when they reported their annual figures. No surprises that Sainsbury’s echoed this experience in its own results release this week. That said, there is so much more to the figures than this general summation and if anything, more questions than answers.
The media were generally split as to whether they were of a glass half-full or half-empty persuasion. In other words, whether they majored on the stellar top-line performance, or the far more sobering bottom line. For what either are worth, for the 52 weeks to 6 March, total group retail sales (exc fuel, inc VAT) were up +7.3% (+8.1% like-for-like). But underlying profit before tax fell 39% to £356m, while the business reported a statutory loss for the year of £261m versus a profit of £255m last year.
Considerable devil in the detail. Profitability was offset by £485m of directly COVID-related costs. A huge figure and another reminder that even “essential” retailers have by no means had an easy ride during the pandemic. It definitely jars that the major grocers have been declared “winners” from COVID, when these figures tell a very different story.
But the COVID-related costs deflected attention away from other exceptional costs that are ultimately what pushed the business into the red. The business struck exceptional costs of £617m, which included £220m of impairment charges and, more significantly, £423m for restructuring programmes. These relate largely to 420 Argos store closures over the next three years, a move announced last November. £423m is a lot to pay for what I personally believe is a grave strategic mistake.
Argos’ figures were, on the surface at least, impressive. Group General Merchandise (GM) sales were up +8.3%, with Argos’ growth of +10.9% compensating for a decline in GM sales at Sainsbury’s supermarkets of -3.8% (a result of a -8.5% decline in clothing sales). Argos digital sales surged 68%, while also “improving profitability”. However, this was not quantified and for all we know, this may actually mean “made less unprofitable”.
I have been critical of Argos’ store closure programme in the past. If every item Argos sold was available for home delivery, it would be less of an issue. But it isn’t. Likewise, if every Sainsbury’s store, supermarket and Local, offered Argos click & collect facilities. But they don’t. Having to go out of your way to a store you wouldn’t otherwise go to (ironically passing a closed-down Argos on the way) is hardly the epitome of customer-first convenience retailing.
By reducing its high street and retail park presence, Argos is, in my firm opinion, giving up its competitive advantage. Having such a versatile footprint is (or increasingly, was) a major point of difference in what we know is an increasingly multi-channel world. If you haven’t got that physical presence and coverage, what is to stop your customers shopping elsewhere, particularly another retailer beginning with ‘A’?
Obviously, there are significant cost implications of having a store network, but Sainsbury’s seems to have fallen into the same trap as John Lewis in misreading their value in a multi-channel world. Closing stores smacks of short-term cost cutting rather than long-term integration and joined–up multi-channel synergy. And paying £423m for a very dubious privilege.
Of course, the results release did include a number of media- and City-friendly statistics and references to online. Group digital sales surged 102% to £12.1bn. Online grocery sales were up 120% and accounted for 17% of food sales versus just 8% last year. It now has capacity to service as many as 850,000 online orders a week.
But only ambiguous commentary on profitability. Apparently, its online grocery operations are “increasingly profitable, with profit contribution four times higher than last year and we doubled the online profit contribution margin versus last year”. Reference my earlier comments regarding making online more cost-effective, but hardly a ringing endorsement of online grocery being highly profitable or at best non-earnings dilutive.
Either way, somewhere between Sainsbury’s profitability been hit by £485m of COVID-related costs and £617m of exceptional items, there is an unquoted figure of the extent to which the flight to online itself eroded profit margin and impacted the bottom line. Unquantified, but it must be tangible.
Arguably the most disappointing figure in the release was the decline in sales of -9.4% at the convenience store business. In a year when many people were forced to work from home and shop locally, convenience stores generally have thrived. Of course, those in urban locations have suffered from vastly reduced footfall, but not all 813 Sainsbury’s Local stores are in Central London, so this must represent under-performance – or possibly even cannibalisation from online?
A couple of final questions: the business is clearly pushing the price button hard through its Price Lock commitment. And clearly, of the ‘Big Four’ Sainsbury’s has most to gain by shouting about price and proving itself to be at least comparable with its peers, on the basis it still has a legacy perception amongst many shoppers of being slightly upmarket and therefore more expensive. But does its Aldi Price Match overstep this and set a low (or inappropriate) bar of aspiration in the minds of many of its own shoppers? Does Sainsbury’s want to be Aldi and surely imitation is the sincerest form of flattery?
Likewise, its 3 year Food First strategy. In principle, absolutely the right strategic course, more than any of the ‘Big 4’ Sainsbury’s reputation and brand stands or falls on the quality of its food proposition and future-proofing and improving this must be front and centre of everything it does. But does instore execution reflect this drive and surely the decision to close all its deli counters (and then try and hide them behind stacked up crates up beer etc) run counter to this strategy? A work in progress, so maybe I should give them the benefit of the doubt for now.
The past year has been tough beyond belief for the UK retail sector, even for those “essential” operators that have been able to trade throughout. All the major supermarkets, including Sainsbury’s, have indisputably done a tremendous job in serving the nation. But as the pandemic hopefully continues to recede, many of the non-COVID, more fundamental questions will return to the fore. And some will be even harder to answer than COVID-related ones.