Have Australian supermarket and general merchandise retailers just been given a preview of an even less comfortable future?
Overnight a string of UK retailers reported their sales results for the Christmas period. Generally they weren’t good.
Most notably Tesco, the biggest UK retailer and the model for much of what has happened at the big end of the Australian supermarket sector, produced a 2.4 per cent decline in like-for-like sales in the six weeks to 4 January in an environment where, for the first time in three decades, the UK grocery market appears to have shrunk in the final quarter of the year.
Tesco wasn’t alone. The fourth-largest UK supermarket chain, Wm Morrison, had a horrendous Christmas, with same-store sales down 5.6 per cent in the six weeks to 5 January. Marks & Spencer’s clothing and homeware sales were down 2.1 per cent, department store group Debenhams had previously warned of a 25 per cent earnings fall and Sainsbury reported its slowest sales growth in nine years.
While harsh weather conditions might have played a role, the interesting aspect of the UK Christmas was that the poor performance of some of the UK’s biggest and most highly-regarded retailers wasn’t the universal experience.
John Lewis, for instance, reported a 7.2 per cent increase in Christmas sales, including a stellar performance from its up-market grocery chain Waitrose. German discount grocery chains Aldi and Lidl have reportedly been experiencing buoyant trading. Upmarket department store group House of Fraser and other premium retailers have performed strongly within a recovering UK economy.
The divergent trends within the various segments of UK retailing point to an apparent polarisation of the market, with consumers moving towards the discount and premium extremes and away from mid-market retailers. As one UK analyst said, consumers are falling out of love with the bigger supermarket chains that have dominated UK grocery and general merchandise retailing in recent decades.
The trends also highlight the shift towards online purchases within one of the most sophisticated online retailing environments in the world.
Online sales in the UK over the Christmas period accounted for 18.6 per cent of non-food sales and were 19.2 per cent higher than in 2012. Tesco said its online grocery orders were up 11 per cent to more than three million orders and its general merchandise orders online were up 25 per cent. Online grocery sales in the UK are about five times larger, as a proportion of overall sales, than in the US.
John Lewis is arguably the most advanced large multi-channel retailer in the world, with nearly a third of its total sales now online. While its total sales were up 7.2 per cent (6.9 per cent like-for-like) its online sales were 22.6 per cent higher.
Significantly, given the ‘’bricks and clicks’’ model now being pursued by most of the established Australian retailers, its ‘’click and collect’’ orders were up about 62 per cent – the ‘’buy-online and collect in-store’’ offer is proving quite powerful.
The UK experience provides a glimpse of a potential future here, given that Aldi is now established in this market and has a major expansion program underway while Costco also has a beachhead and is developing a bigger footprint.
If there is a similar polarisation of the grocery and general merchandise market here, they would be the obvious beneficiaries, along with Kmart and Big W, while Target, Myer and David Jones would need to think carefully about where they position their offers.
Online retail sales in Australia represent only about a third of the penetration achieved in the UK, but are growing and will accelerate as the major retailers, late adapters, push more heavily into that space. The UK and US experience underscores the value of the multi-channel proportion.
The rate at which consumers are shifting to online purchases in the UK has surprised the sector, with Tesco’s chief executive, Philip Clarke, saying that multi-channel was moving faster than anyone had anticipated.
If the Australian experience were to track what has occurred in the UK the local multi-channel retailers would have to accelerate the development of their IT platforms and supply chains.
The much-publicised problems with Myer’s online offer in recent weeks underscores the extent of the challenge for local retailers in ensuring their platforms and supply chains can meet consumer expectations.
It is also worth noting that online sales in the UK occurred far later in the pre-Christmas period than in the past, indicating increased consumer confidence in retailers’ fulfilment processes, with an increasing proportion of purchases occurring on mobile devices.
Tesco, long regarded as one of the best, if not the best, grocery chains in the world – and the model for much of what the Australian supermarket chains have been doing – is responding to the changing retail environment by starting to downsize its biggest stores and halting the ‘’space race’’ or scramble to open more and larger stores that has been a feature of the UK, and Australian, grocery markets.
As the growth in online purchases accelerates, there will be a point where the size of store networks and the selling space within individual stores will have to be re-thought. The UK experience suggests that that moment, while perhaps not yet upon us in this market, is closer than might previously have been recognised and could arrive quite abruptly.