Strong occupational growth set to continue

The appeal and provision of value-orientated brands in the UK retail market has seen significant growth over the last decade, and the grocery sector is certainly no exception. A high-level comparison of the top 25 out-of-town retailers in 2009 and 2020 makes this case very effectively. Back in 2009 Lidl was the only value-orientated brand in this group, in 25th place with 121 stores. Aldi and Iceland both sat well outside the top 25 with 99 stores and 38 stores respectively. Fast forward to 2020 and there are five value-orientated brands in this group with the grocery retailers leading the charge; Lidl sits in the top spot with 816 stores, Aldi second with 597 and Iceland fifth with 354.

Continuing the retail warehouse example, it is therefore no surprise the grocery sector has been recording well above the decade average for new foodstore openings in recent years. 2018 saw 179 new grocery stores in the out-of-town market, whilst last year saw as many as 221, a record high for the last ten years and well above the average at 143. What is even more encouraging is that this strong growth performance has continued in 2020, in spite of the pandemic and the obvious disruption to trade across the wider retail market. By the end of Q3, new foodstore openings accounted for 153, already above the decade average, with a quarter of the year yet to come (see chart, below). As a result of this activity, grocery units accounted for more than a fifth of new retail warehouse openings last year, the first time it has done so since 2011. So far this year grocery has accounted for 26% of new openings, up from the 22% recorded in 2019.

A look at the top 12 most acquisitive brands in the retail warehouse market for 2020, draws attention to the aggressive strategy of portfolio expansion for each of the value grocers, even against a background of weak consumer confidence amid the global pandemic. The immediate post-GFC period showed that if consumers swing into belt-tightening mode, then it is the value end of the spectrum that benefits most. This suggests that whatever the political and economic outcome of the recent pandemic, the strong growth in demand from the value retailers will very likely be sustained. By way of an example, Lidl opened 46 new stores in 2019 totalling 908,000 sq ft. So far 2020 has seen them open 52 new stores, equating to just over 1m sq ft (see table, below). Aldi and Iceland have also continued to pursue strong growth strategies, opening 33 and 15 stores respectively, all at over 10,000 sq ft gross. Since 2015, value-orientated brands have in fact accounted for more than half of all new grocery openings each year and as much as three quarters of all supermarket acquisition activity by Q3 2020.

There has undoubtedly been a structural change with regard to rents in the UK retail market in recent years, and it is clear this has been the driving force behind the acquisition activity we have witnessed in the grocery sector in particular. Value-orientated brands have been particularly opportunistic, looking to expand their operations or renegotiate existing leases and seize the opportunity to acquire space at a more favourable rent. That said, the chart below highlights how the decline in rental value growth for supermarkets has been much less severe than for other areas of the retail market. MSCI report year-on-year rental value growth of -1.1% for foodstores in 2019, whereas it stands at -5.9% for the rest of retail. 2020 looks set to repeat this pattern, recording a -0.9% year-on-year rental decline for grocery stores, much more in line with ‘all property’ types, and significantly less than -8.8% for all of retail.

The resilience the grocery sector has shown in regards to rental decline is undoubtedly linked to its ongoing positive performance and the relationship the market has between physical stores and online sales penetration. Food and grocery expenditure has been growing steadily for some time, with annual growth of between 1% and 3% since 2015, according to GlobalData. However, as a direct result of the global pandemic, the UK food and grocery market is forecast to have grown by 10.1% in 2020, the highest annual growth in over four decades (see chart, below). March and April saw an explosion in expenditure growth as shoppers began panic-buying and stockpiling non-perishables. According to the Office for National Statistics, overall UK retail sales declined 5.1% in March from February, the largest drop since the agency started collecting the data in 1996. However, food sales and online-only businesses were the only areas to see growth in that period, with supermarkets and other food stores recording a 10.4% increase in sales in the same period.

Foodstore operators have also made significant gains in the months following, as the UK remains in a state of flux between national lockdowns and the localised tier restrictions. Consumers have turned to grocery operators in the absence of hospitality and foodservice locations, with food sales set to outperform the total grocery market for the first time since 2017. This is supported by strong volume growth across core ambient categories, with other influences, such as 5.3% of UK shoppers buying a pet during lockdown, buoying secondary markets such as pet food.

A number of non-food categories in the grocery sector are also recording a significant uptick in expenditure. With pubs and bars either closed or restricted for much of the year, 2020 has seen a 14.5% increase in alcohol expenditure in supermarkets after an initial jump of 31.4% in March when the first lockdown was announced. Household products have proven to be the fastest growing sector, forecast at 21.6% in 2020, as shoppers have rushed to buy cleaning and sanitation products for protection against the virus.

As a vaccination programme is rolled out and the UK consumer once again begins to visit restaurants, pubs and foodservice outlets in significant numbers, food and grocery sales are expected to retract somewhat. We saw a glimpse of this in mid Q3, when the grocery market resumed some semblance of normality, with the government’s Eat Out to Help Out scheme, encouraging shoppers to spend on food and drink at non-retail locations. That said, overall food and grocery expenditure is not expected to return to the levels we saw pre-pandemic, highlighting a noticeable and permanent improvement in advance of the sector’s normal growth trajectory. As a result, the growth rate will naturally show a decline, estimated at -5.3% for 2021, but is expected to return to normal levels of growth by 2023 (see chart, below).

Despite the unprecedented performance in the sector in recent months, many analysts might point to the growth of online penetration in the grocery sector as a potential threat to the physical store in the years ahead. The channel shift from offline to online has been dramatic in food & grocery this year, with penetration set to jump from 7.4% to 12.5% – a transference of £9.7bn. Since late May, online spend has been running at double that in 2019. Many consumers who have always shopped in-store have reverted to completing their transactions online to avoid venturing into stores and potentially being exposed to the virus. The surge in demand for home delivery options in March and April was high enough to cause website crashes, however, since then, supermarkets have been quick to swell capacity to deal with this demand. Tesco, for example, doubled its online fulfilment capacity in a space of six weeks. Grocers quickly realised they needed to invest in their online propositions, capabilities and loyalty programmes, encouraging shoppers to take more spend online than pre-2020 going forward. Their willingness to do so highlights a strong omnichannel approach by the UK’s major grocery brands and actually alleviates the concern of the importance of the physical store going forward. Unlike much of the rest of UK retail, where the rise of e-commerce can directly impact on the volume and value of goods sold in-store, online grocery orders are typically serviced by the stores themselves, making the true value of the store in the grocery sector, much greater than is initially obvious.

Supermarkets and convenience stores have of course been considered essential throughout the pandemic. Out-of-town foodstores accounted for more than a third (35%) of all the essential retailers permitted to trade immediately following the government sanctions in March. As a result we have seen significant sales improvements for individual brands, echoing that in the wider market as a whole. The chart, below, has seen Tesco’s year-on-year gross sales increase from -0.8% in the 12-week period up to February 23rd 2020, to 10.4% in the 12-week period to the end of November. The online supermarket, Ocado, has unsurprisingly seen the most significant sales growth, from 10.8% in the same 12-week period in February, to 38.3% in the same 12-week period in November, resulting in a market share of 1.7% of the UK grocery market as a whole (see chart, below). Meanwhile, Lidl reached a new record market share of 6.2%, and Aldi’s sales were up by 7.0%, with a 7.7% share of the market, demonstrating the strong consumer demand for value-orientated operators and underpinning the strong acquisition activity they have continued to demonstrate this year.

With Covid-19 cases rising again as we entered Q4, and social distancing measures, therefore, tightening once more, shopping habits in the final quarter are more likely to resemble that of Q2, which again could mean a significant uptick in foodstore operator performance. Consumers are expected to spend close to £12 billion in the supermarkets during December, around £1.5 billion more than last year. With consumers again likely to want to limit the number of visits to stores, we expect to see basket sizes increase dramatically on last year, as they did at the start of the pandemic. Research from Kantar suggested that the amount families spent on a shopping basket reached a record high in April, with £26.02 being spent per supermarket visit, £7 higher than the same time last year. Out-of-town foodstore locations are also set to benefit, particularly from consumers with a defined shopping mission wanting extra physical space to shop in.

The dynamics of the food & grocery market in 2021 will rest heavily on the progression of the pandemic, both in the UK and abroad. With social distancing restrictions likely to continue to at least the end of Q2 2021, we expect that increased food and grocery spend will continue in H1, before gradually reducing from July 2021 onwards. It is important to note a full transference of online spend back to offline is not expected, as for many consumers, the initial barriers to entry for online shopping have been hurdled, and the convenience it offers means the channel will retain a sizeable proportion of its new-found revenue.

Despite the positive outlook for the sector, some foodstore operators have reported that the implementation of social distancing measures has started to temper both their in-store sales and profit margins as they are simply unable to serve the same volume of consumers as before. Furthermore, they have had to increase staff levels in order to implement such social distancing measures. As restrictions tighten in the run-up to Christmas, peak online delivery slots are also already at a premium for some major supermarkets, therefore how to continue to meet consumer demand and also turn a profit will remain an important consideration for many brands.

A number of supermarkets have already begun to use digital queuing systems, 24-hour trading and door marshals to avoid problems in what is expected to be their biggest ever Christmas sales period. Over 300 Tesco stores will be open for 24-hour trading in the run-up to Christmas Eve, while Tesco has also installed a traffic light system in most stores to regulate the flow of shoppers. Waitrose has launched a queueing app, called Qudini, which enables shoppers to book a shopping time slot remotely, and will also be extending their opening hours. Meanwhile, Sainsbury’s supermarkets will do the same, while it is also offering members of its Nectar loyalty scheme extra points if they shop in advance of Christmas week, to persuade its customers to plan ahead.

Looking into 2021, Brexit is the one potential spanner in the works, as it will undoubtedly lead to a disruption in retailer supply chains and their ability to get goods into the UK. Supermarkets have already begun to stockpile food and other goods after being told by ministers that a no-deal Brexit is on the cards. Potential shortages of fresh produce could scupper the strong performance we have seen in the grocery sector, particularly if a no-deal scenario leads to tariffs and inevitably increased costs for retailers, which would, in turn, be passed on to consumers. That said, emergency planners are predicting that no-deal would spark panic-buying on a scale that could dwarf the coronavirus crisis.

_{Read the articles within Spotlight: UK Grocery Report below.}