The retail note - 19 May 2017
Stephen Springham, Head of Retail Research, breaks down the latest sector headlines.
4 minutes to read
- Official retail sales in April grew by 2.3%, almost double the expectations of many economists, according to a number of media reports. The fact that ‘many economists’ persist in analysing month-on-month trends rather than year-on-year ones and don’t understand the seasonality of retail (e.g. the timing of Easter) does call into question the credence of some forecasts. Year-on-year retail sales values (exc fuel) were up 6.5% and volumes (exc fuel) were up 4.5%.
- SuperGroup is one of the few retailers to have benefited from the devaluation of sterling. Group revenues rose 27.2% in the year to April 2017 to reach £750.6m, of which £501.6m equated to retail revenues. Like-for-like sales rose 9.4% and online sales surged 35% due to improvements to the product range, including introducing new categories to maintain the brand’s relevance, as well as investments in infrastructure.
- Asda continues to be the poorest performing of the Big Four food operators. The business reported a 2.8% decline in like-for-like sales for the three months to the end of March, its 11th consecutive quarter of falling sales. Although the trend is improving from a nadir of -7.5% in Q2 2016, in the context of soft comparables and a growing grocery market generally (in both volume and value terms) these are still weak numbers.
Stephen Springham, Head of Retail Research:
Those of us that have tracked Aldi for many years (24 and counting in my case) are maybe less surprised that it has achieved such elevated status, much more that a once-secretive organisation is now so media-friendly. From an age when the business was so opaque that they wouldn’t even acknowledge their own company name on a phone call, UK chief executive Matthew Barnes is now merrily courting media attention and publicly announcing the extent of its expansion plans. Today’s analysts have it far too easy.
Currently operating 700 stores, Aldi had previously set guidance of 1,000 stores by 2022. Mr Barnes hinted that the figure could now be closer to 1,300, given that 300 new stores have already been approved. In terms of general metrics, the business sees scope to open an Aldi store for every 25,000 to 30,000 people, adding that “there are 600 town locations where we don’t have a store; in many of which we could easily have two, three or four stores. We don’t have a store in Watford, but that would be a six to eight Aldi town.” A loose, long-term target of 2,600 UK stores has also been set.
Cue a frenzy of positive media coverage, along the lines of Aldi quadrupling its UK store footprint and the possibility of it breaking into the Big Four (strange that when Tesco was similarly aggressive on store expansion a few years back, the media reaction was far less supportive). While the Big Four are hardly blazing an acquisition trail at the moment, Aldi’s statement of intent is indeed as bold as it is powerful.
But physical expansion is just one of Aldi’s pillars of success. Constantly attracting (and retaining) new customers is another of the central planks of its strategy, but probably the hallmark of its success is its ability to continually increase average basket size. In grocery retailing, this is something of a ‘holy grail’ – enticing shoppers to spend more than they planned or budgeted is the epitome of good retailing, and one that the Big Four are currently struggling to achieve. In more general terms ‘winning the hearts and minds’ of UK consumers has been as much a growth pillar as anything - Aldi has proved very adept at modifying and compromising its fundamental business model to the dictates of the UK consumer. Hence, in some respects, the media charm offensive.
If anything, opening stores is perhaps the easiest source of growth. But this is potentially where one of the biggest downside risks to Aldi’s future success lies. Clearly, there are still considerable gaps in its geographic coverage and there is still headroom for further expansion. But each store opening carries an increased risk of cannibalisation. Staggeringly, Aldi’s UK sales densities have almost doubled over the last decade and now exceed the magic £1,000/sq ft mark. Whether they can be sustained at this level as cannibalisation increasingly becomes an issue is debateable. A single store in Watford may achieve this level (and some). Six or eight most definitely won’t.
Of course, these metrics won’t be discernible to the outside world. Aldi is still a privately-owned company and the accounts that it files give precious little detail (no like-for-like figures, distortions by consolidating the Irish figures alongside those for the UK etc etc). More media-friendly than before the business may be, but underlying transparency is still cleverly selective.
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