Weathering Global Challenges
As recession, austerity measures and inflation played havoc with household budgets throughout much of Europe in 2012, individual grocery chains tried various strategies to promote sales and maintain profits.
Price, however, was a common denominator in those strategies, with coupons, promotions, a quality-value merchandising approach and an emphasis on private label becoming common. At the same time, conventional grocery retailers confronted more competition from discounters and high-end competitors, and many looked to emerging markets for expansion opportunities. News reports of corruption emphasized cultural differences in foreign markets, while experts advised multinational retailers to play it safe by training workers and suppliers on anti-corruption.
In Europe, price perception became more important in an uncertain environment, according to Andrew Stevens, senior retail analyst at London-based Verdict Research, although studies indicate pricing gaps between retailers were far less than perceived. Price comparison websites also became popular, with www.mysupermarket.co.uk visited by more than 2 million shoppers a month.
The growing gap between middle- and lower-income consumers and more affluent shoppers translated to strong sales at discounters such as Aldi and Lidl and at upmarket stores like Waitrose, part of the John Lewis chain, Stevens says.
"On one hand, we've got a lot of people trading down, going to discounters and away from middle-market chains like Tesco, which has struggled over the past 18 months [to] two years," Stevens says. Consumers earning more money might shop at Waitrose for specialty products but go to discounters for essentials and everyday items, he says.
Kantar Worldpanel's market share report for the 12 weeks ended Jan. 20, 2013, shows Aldi outperformed year-ago sales at the cash register by 28.2 percent, boosting its grocery market share to 3.1 percent versus 2.5 percent for the 12 weeks ended Jan. 22, 2012. Lidl also posted strong results, boosting sales 10.0 percent from the year-ago period, while Iceland turned in a 9.6 percent gain. Market share for each rose 0.1 percent.
For the same period, upmarket Waitrose reported an 8.0 percent sales gain and a 0.2 percent upward tick in market share. Tesco, which saw a recent revival, held its market share at 30.4 percent on a sales gain of 3.3 percent, while Morrisons' sales fell 1.7 percent from the prior year, reducing its market share to 11.9 percent from 12.5 percent.
Belt-Tightening Impacts Brands
As consumers tightened their discretionary spending, food retailers focused on brands that made money, those at the premium end of the market, and many prioritized private label, according to Raphael Moreau, retail analyst at Euromonitor. "Private label strategy is becoming more important to establish low-price image with consumers," he says. "With higher food prices and the recession, consumers were less loyal to food brands and more willing to switch to private label."
With higher food prices and the recession, consumers were less loyal to food brands, and more willing to switch to private label."
Discounters fared well against hypermarkets in most major European markets, notably in Italy, Spain and the U.K., due to the saturation of hypermarkets and the fact that consumers cut down nonfood purchases. Among hypermarkets, the smaller formats performed better, notably in France, where the Hyper U and Leclerc chains outperformed Carrefour.
In the U.K., high fuel prices and the overall squeeze on discretionary spending discouraged people from driving to large format stores on the outskirts of town, says Verdict's Stevens. "They'll either buy online or travel less frequently to the large store outside town and top off their grocery shopping with visits to a smaller convenience store." Tesco, the market leader with nearly 3,000 stores in the U.K., has both formats, but the majority are huge outlying stores, which carry a lot of nonfood products.
Online shopping, still a small percentage of sales, became the hot new merchandising area in grocery sales from Europe to China. In Europe, e-commerce is strongest in the U.K. and particularly low in Germany. IGD projects the U.K. market will double in value by 2016 to 11.2 billion pounds. Some retailers see it as an important part of a holistic merchandising approach, but retailers like Tesco recently announced plans to create a network of online-only "stores."
High delivery fees and minimum purchase requirements challenged e-commerce growth, particularly in France and Germany, but U.K. retailers countered with free delivery for purchases that cost more than 50 pounds. So-called "click-and-collect" concepts, where shoppers order online but pick up the groceries from a central location or at the store, also expanded throughout Western Europe in 2012.
Corruption Makes Headlines
While global supermarket expansion was in the news last year, so were stories of retail corruption. The investigation into alleged bribes paid by Walmart's Mexican unit to expedite store construction captured global headlines.
In November, Walmart announced it was expanding its investigation into the company's compliance with the Foreign Corrupt Practices Act – which prohibits American companies from bribing foreign officials – to Brazil, China and India. Although the Mexico compliance issues were uncovered in 2005, news of it surfaced last spring.
The Foreign Corrupt Practices Act has been on the books since 1977, but has been enforced more keenly in the past seven or eight years, says Mark Sullivan, a principal at Grant Thornton LLP.
"I think the Walmart case has opened a lot of eyes for businesses with international operations, making them realize, 'This probably does apply to us,'" says Sullivan, who heads up Grant Thornton's Retail Industry Group and leads the Investigations Service Line on a national level.
New Focus on Emerging Markets
Fast-growing middle-class markets in China, India and Brazil, already penetrated by large U.S. food and drink producers, are attracting greater interest from grocery and consumer packaged goods retailers looking to boost revenue and profits.
In China, grocery retailing is a local, city-based business that accounted for 23.4 percent of total retail in China's largest cities last year. Consumer visits to hypermarkets and supermarkets fell last year, but shopper spending increased 13.9 percent in hypermarkets and 11.1 percent in supermarkets, according to Kantar Worldpanel. E-commerce soared 53 percent last year, but still represented just 1.5 percent of total fast-moving consumer goods sales.
Carrefour, Tesco and R-T Mart (a Taiwan-financed hypermarket company) were major forces in large-format Chinese food and grocery retailers in 2012, along with giant Walmart. Walmart entered China with its first Supercenter and Sam's Club in Shenzhen in 1996 and as of March 2012 operated 370 stores, including Neighborhood Markets, in 140 cities and 21 provinces.
In India, the government liberalized its retail sector policy in 2012 to encourage foreign retailers and boost the country's economy. However, Indian authorities are now investigating Walmart for allegedly violating India's foreign exchange rules prior to liberalization, according to news reports. Nonetheless, Walmart told Reuters in November that it expects to open its first retail store in India within 18 months. Walmart's entry may be difficult, however, as opposition Indian political parties in several states oppose foreign competition for their small, local food sellers.
"Retailers looking to expand overseas must do their homework on each individual market, because business is done differently in each market," stresses Sullivan at Grant Thornton.
Other countries are stepping up their anti-corruption regulations. Recently, the People's Republic of China (PRC) amended its criminal law to cover bribing non-PRC officials and officials of international public organizations.
India, which ranks 94th of 176 countries Transparency International's Corruption Perceptions Index (www.transparency.org/cpi2012/results), is being shaken by anti-corruption forces, which are exposing corruption among leading politicians, according to Bloomberg and BBC reports.
Grant Thornton LLP
"The fact that bribery may be a 'way of doing business' in other countries does not exempt companies from looking hard at the risks of entering an emerging market," says Sullivan. "Just because this is how business is done, it doesn't give you permission to do business that way. But it is a risk that you need to prepare for. You need to look at your own international practices and make sure you have effective compliance programs."
The way retailers do that, Sullivan says, is to create a very strong tone at the top of zero tolerance for corruption. It needs to be well defined, adopted and disseminated at all levels of the organization, including to third-party suppliers. Executives must provide anti-corruption training for people throughout the supply chain, he says, and then, they have to monitor it.