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IRUK Top500 Food for thought

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The big supermarkets have had a tough time, but don’t count them out just yet…

The way we buy groceries is changing, which is putting huge pressure on the supermarkets. This much we know because of an almost daily diet of news stories that tell of how, for example, Tesco and Sainsbury’s are struggling to fight off competition from German discounters. But how true is this picture? Without denying the challenges, it’s worth taking a step back and looking at some raw statistics.

According to analysts Kantar Worlpanel, at the turn of 2016/17, the so-called ‘big four’ – Tesco , Sainsbury’s , Asda and Morrisons – collectively commanded 71.3% of the British grocery market. While that figure is down from 74.1% two years ago, it still speaks of retailers with heft and reach.

This picture is backed up by our research for the InternetRetailing UK Top 500, which sees leading supermarkets performing strongly. While this is in part because of the Footprint of the companies – our Index favours bigger companies – that’s by no means the whole story. We found the sector performs particularly strongly in three Dimensions: Strategy & Innovation, Mobile & Cross-channel, and Operations & Logistics. Below, we look at each of these in turn.

Strategy & Innovation

It may seem counterintuitive to suggest that big supermarkets are innovative but this is an area where size matters. That’s because supermarkets can afford to experiment at a small scale to see if things work, but then have the resources to undertake large scale transformative projects.

For an example of how this works, consider the tie-up between Sainsbury’s and Argos . In January 2015, the (then) two companies announced that Argos was opening 10 digital-format stores, concessions, within Sainsbury’s branches. “These 10 Argos stores will complement our supermarket offer, giving customers the opportunity to shop for an extended range of non-food items,” noted Sainsbury’s CEO Mike Coupe at the time.

Clearly, things went well. Sainsbury’s subsequently bought Home Retail Group , the parent company of Argos and Habitat. The supermarket is revamping stores around the country to include Argos concessions and, in September 2016, announced plans to open five Mini Habitat stores in Sainsbury’s stores.

Mobile & Cross-channel

According to InternetRetailing research, the load time for supermarkets’ mobile websites outperforms the fashion sector. It’s a reminder that many supermarkets were early onto the web and have been able to bring their experience to bear on the transition to a mobile-first world.

To inject a note of caution, the idea of cross-channel retail poses problems for supermarkets in that supermarkets have traditionally expanded by building and buying more stores. Along with other factors, the rise of ecommerce has undermined this strategy of ‘more is more’. In January 2016, Tesco CEO Dave Lewis announced that the retailer wasn’t going to proceed with the construction of 49 large supermarkets because the company “quite simply could not afford” them. One lesson here is that supermarkets need to make real estate work as part of a wider cross-channel strategy.

Logistics & Operations

Of the three areas where supermarkets perform best, this is perhaps the least surprising. When customers order a weekly shop, it can’t arrive a day late and every delivery slot has to be honoured. Accordingly, supermarkets quickly invested in the infrastructure necessary to make this happen, to the extent that vans unloading groceries are now a familiar sight on Britain’s streets.

That said, there’s no room for complacency. For a start, as Morrisons discovered a few years back when it didn’t prioritise ecommerce, not focusing on digital makes investors and customers unhappy. More seriously, the recent announcement of Morrisons at Amazon , which enables Prime Now members in London and parts of Hertfordshire to have a grocery order delivered within the hour, offers clues as to how this sector will develop.

It will also be intriguing to see how new kinds of services, such as the Amazon Dash replenishment service, which enables customers to order such products as washing powder at the click of a button, will affect the grocery sector. It may be that such services will erode the need for the family shop at a time when the notion of buying groceries for the week is already anathema to many urban and younger customers. If this is the case, the supermarkets will need to respond.

To conclude… while we shouldn’t underestimate the challenges faced by the supermarkets, the idea that the companies themselves aren’t aware of the problems or finding effective ways to fight is to overstate what’s happening. Announcements of the death throes of the British supermarket, while they make for good headlines, are premature.

This analysis is from the latest IRUK Top500 2017, which identifies the leading UK multichannel and ecommerce retailers, exploring their performance through six key Dimensions. To explore the publication further click here.

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