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Structural Changes for UK Food & Grocery Sector

A new dawn for the UK food supply chains?

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The impact of Brexit on UK Food and Grocery supply chains

It is a momentous time for the UK food and grocery sector, with new technology, increased consumer choice, fiercer competition and game-changing industry consolidation leading to a major power shift between wholesalers, retailers and the consumer. 

Disruption is so common it has become the norm across the sector. For retailers to become more profitable and fit for survival in the digital age, they have to keep up with consumer demands and expectations. This means new innovative strategic partnerships that no one thought possible just a few years ago. 

Tesco kicked things off with its £3.7 billion acquisition of Booker in 2017, and pending further investigation (at the time of writing), ASDA and Sainsbury’s £7.2 billion merger could be next. Throw in Amazon’s foray into the online food market and the rise of discounters and it’s not surprising to see retailers taking steps to adapt to these new market forces. 

As retailers and wholesalers continue to partner up, it’s likely that strategic partnerships will ripple through the sector, and down the supply chain. 

Furthermore, technological innovation is also altering the way customers buy and consume food. Online and takeaway options have exploded and are growing, while people now seek a wider and more pleasing shopping experience. 
 

Online food sales have more than doubled from 2010 to 2017

Online food sales have more than doubled from 2010 to 2017

 

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Market structure within UK supermarkets

Environmental factors are also becoming more important as shoppers look to do their shopping closer to home and buy produce from local suppliers in an effort to be more ethical about what goes in their basket. The conscious consumer is more present than ever. 

The full report contains an overview of the food and grocery sector since the turn of the century and looks at the current trends, before focusing on what we forecast for the next five years. 

Societal shifts have played a huge part in where and how we shop. Since the early 2000s the retail grocery market has been dominated by the Big Four supermarkets – Tesco, Morrisons, ASDA and Sainsbury’s and their rapid expansion and the rise of their urban supermarkets.

However, thanks to new technology, retailers can be more transparent about pricing, service and quality, which enables discounters a much firmer foothold in the market, as evidenced by the likes of Aldi and Lidl having increased their market shares.

Factors impacting the Big Four’s dominance include:

  • Volume of choice and access to it chiming with customer preferences
  • Ease and convenience 
  • Value-for-money
  • Healthier lifestyle choices
  • Shopping as an experience

Consolidation has become key, as the rapid expansion of the past decade and a shift in consumer preferences have led to a disconnect between business models and consumer needs. 
 

Comparisons of market share shift – Big Four vs Discounters

Comparisons of market share shift – Big Four vs Discounters

 

Source: Kantar World Panel 

 

Retailers adapting to market shifts

Retailers are shifting strategies to become more competitive and productive, and to secure future growth. As a result the line between retailer and wholesaler has become blurred, and in order to stay competitive they are having to:

  • Rebalance costs 
  • Reduce or simplify space and repurpose excess capacity
  • Simplify ranges 
  • Cut labour, as a simpler business model needs fewer people
  • Price cut to survive the store war, but at the consequence of profit margins
  • Diversify to grow
  • Move online, with online food sales expected to rise by 48% by 2022
  • Promote own-brand products 

 

Focussing on the consumer 

Overall, the industry has a renewed, laser-like focus on customer’s needs in the context of wider market developments. Retailers are now more agile and fit-for-purpose than at any point over the last decade. With stronger balance sheets, renewed focus and firmer strategies in mind, the pace of structural change is likely to accelerate. 

Consumers are shopping more often, but buying less, and with visits to stores up by 14.3% from 2013 to 2018, retailers could use the opportunity to attract more casual shoppers.

Demand for lower prices has seen a decline in brand loyalty, and the explosion of takeaway food platforms has seen it grow at twice the rate of the retail food sector. 

Shoppers expect retailers to do better. Convenience and good value is one way to attract customers, but a delightful experience is becoming more important, with extras like free coffee and sushi bars carrying a potentially big impact. Consumers also want to shop at places that care about the things they do, such as sustainability, ethics and healthy living. 
 

“Consumers are shopping more often, but buying less, with visits to stores up by 14.3% from 2013 to 2018.”

 

Future trends in the sector 

As the future of the industry evolves with technology playing a key role, and as the Brexit process provides greater clarity, the sector will undoubtedly continue to undergo significant developments which will be of utmost interest.  Key trends to watch out for include:

  • Consumers are shopping more often
  • Demand for lower prices leading to less brand loyalty. 
  • Takeaway food platforms taking off. 
  • Tighter margins and tougher competition 
  • Creative partnerships
  • Amazon entering the supermarket arena 
  • Increased awareness of sustainability-related issues in the sector
     

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About this report

This research was conducted by Retail Economics in partnership with Barclays Corporate Banking. In this report, we focus on a new era for UK food supply chains and the impact of Brexit. Here, we include an overview of the food and grocery sector since the turn of the century in Part 1 and look at current trends in Part 2. Part 3 focuses on the different Brexit outcomes and what this is likely to mean for the industry when it comes to costs and tariffs over the five-year post-Brexit period. Case studies are included, together with a look at Brexit tariffs, and lastly various industry trends to watch out for. 

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