How COVID-19 Changed The UK Retail Grocery Market

BY Authored by Simon Latham, a Senior Manager at 4C Associates.

The UK grocery sector is now discovering what the new normal will look like following almost two years of extreme turbulence due to the COVID-19 pandemic. During this time, many retailers transformed their business models and operating practices at lightning speed and scale to meet three big challenges:

1. Surging demand for online shopping via delivery and click and collect

2. Supplying higher overall sales demand for essential food and drink items, including stockpiling and a move back to bigger weekly shops

3. Ongoing major new in-store safety management improvements to reduce COVID-19 risk

The revolutionary and fast paced changes introduced contrast with the relative stability and evolutionary progress over the previous decades. In combination with massive challenges to operations and supply chain, as was the case for most businesses, there were also drastic changes in consumer behaviour – forcing retailers to transform many aspects of activity.

Although this retail revolution created opportunities to benefit from additional consumer demand and increased sales volumes, it also left battle scars in terms of reduced profitability due to much higher costs of doing business in new ways, particularly the high costs of online shopping.   The race to scale-up online sales at speed has also created winners and losers. Market share swung in favour of those with an established online presence and the financial resources to change operating models quickly. This change in customer behaviour changed the metrics on which grocery retailers fiercely compete. The traditional competition area of value for money was diluted in favour of online, safety and convenience.

The dramatic shift to online shopping

The dynamic of UK grocery shopping shifted dramatically from March 2020 as the pandemic began. With Government guidance to stay at home as much as possible, along with widespread caution around visiting busy places, such as supermarkets, it is no surprise that demand for online grocery shopping surged. With online sales spiking, retailers struggled to manage demand. This dramatic change in grocery shopping habits is illustrated by 4C Associates’ recent survey which shows that 61% of respondents used online shopping over the 12 months to May 2021 and 39% increased their use of online shopping.  This trend is in sharp contrast to the previous decade, where, although the number of people shopping online for food and other groceries had doubled , growth had been incremental and predictable. For example, in 2019/2020, an estimated 10% of UK shoppers purchased food items over the internet once a week.

The first obstacle grocery retailers had to overcome was scaling their home delivery capability to meet demand. Across the seven main grocery chains that offer their own home delivery service, the weekly delivery slot availability grew by 140% from the beginning of 2020 to the end of the year, reaching almost 5 million weekly slots.  By the end of the year, Tesco had doubled its online delivery slots to 1.5m per week, while Iceland increased online capacity by 650% bumping it into fourth place in terms of weekly delivery slots, behind Tesco, Asda and Sainsbury’s.  This shift required a mighty and rapid response from grocers. It became a race to recruit drivers and pickers, and to grow the delivery fleet to capitalise on this demand shift – thus ensuring that custom was not lost to competitors who were able to scale more rapidly.

Managing online demand didn’t come cheap. Although businesses benefited from higher revenues due to higher demand for food and drink items, greater use of online shopping came at a cost to profit to many retailers and loss of market share for others. Online delivery and click and collect involves a hugely different logistical operation to traditional in-store purchasing. It requires investment (online systems technology, fleet, staff, etc) and also adds significant additional service costs, e.g. additional staff for picking, packing and delivery activities. In addition, the shift to online meant that impulse purchasing opportunities were reduced, and shopping transactions were made up of an increasing proportion of lower margin products.

The impact of increased sales demand

In tandem with the shift to online, there was a large increase in grocery sales. As schools, workplaces and hospitality began to close down, people were forced to eat and drink at home. In the week ending 22 March 2020 (just before the first lockdown was announced) data from Public Health England shows that the highest ever volume of food and drink sales was recorded. This was 43.6% higher than the equivalent week in 2019. While some of this increase was due to panic buying and stockpiling, sales volumes continued at higher levels, as illustrated by Public Health England figures for the four-week period ending 21 June 2020, where volume sales were still 17.7% higher than the same four-week period in 2019 – despite an easing of restrictions.

Whilst sales increased, grocer margin mix took a hit – sales fell on many high margin products such as convenience food (affected by people cooking more at home) and non-food (caused by reduced in-store and impulse purchasing opportunities).  According to Public Health England, category sales with the largest increase quarterly increase up to 21 June 2020 were alcohol (27.6%), home cooking – savoury (26%) and sweet (23.5%), frozen meat (19.1%), savoury carbohydrates and snacks (18.8%) and frozen confectionery (17.8%). Families with the youngest child aged 0-4 years increased their purchasing most (up 22% on the previous year, while adults of working age without children also purchased 21% more groceries).  Sales data for the three months prior to mid-June, demonstrate that volume is dipping, but sales are continuing at much higher levels than pre-COVID.

The pandemic fundamentally changed the look and feel of the grocery industry, with 10 years of innovation delivered in 6 months. This has raised the bar on customer expectations and demonstrated what’s possible.  Those who will continue to win in the even more competitive future grocery market, will be those who can adapt, innovate and collaborate with agility to meet customer needs cost effectively. It will be critical to seamlessly blend online and in-store sales channels, with advanced analytics, supply chain strength and collaboration, and a relentless focus on efficiency, all essential to success in a new fast-paced normal for grocery retail.

By Simon Latham, a Senior Manager at 4C Associates

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