Retail Memo - UK: Sainsbury's CEO and Tesco Marketing Chief Offer Differing Analysis of Food Retailing and Shopper Behavior at Retail Week Conference

News & Analysis

The British trade publication Retail Week is holding its annual retailing conference this week in the United Kingdom.

Today, executives from two of the UK's top supermarket chains, number one Tesco and number three Sainsbury's, addressed the UK retaling conference focusing on what each chain views as the state of food and grocery retailing and food shopper behavior in the nation at present in these recessionary times.

Representing Sainsbury's and speaking at the conference was its CEO, Justin King. And representing Tesco was Carolyn Bradley, the supermarket chain's director of marketing for the UK.

Interestingly, Sainsbury's CEO King and Tesco's Ms. Bradley painted an almost complete opposite picture of how their respective chain's are currently viewing consumers and food retailing in the UK, which like the U.S. and most elsewhere in the world is in the midst of a severe recession.

For example, Tesco UK marketing chief Bradley said the nation's leading supermarket chain believes consumers are trading down. Therefore Tesco has and continues to adjust its merchandising, marketing and promotions in a more discount price, value-based direction, she said in her speech.

According to a story in Retail Week today, she said UK consumers' trading down behavior is "manifesting itself through them changing lots of little things: consumers doing without a latte, finding cheaper ways to treat themselves and trading off larger purchases such as sofa or a holiday."

But in contrast, in his speech, Sainsbury's CEO Justin King said he doesn't see a significant consumer trade-down in the UK. Rather, he argued in his speech that the middle, where Sainsbury's is positioned in the market, continues to hold.

Below (in italics) is a summary of what CEO King said in his talk, from a report in Retail Week today:

"King said assertions that consumers are downtrading, that people revert to selfish behaviour and that the middle ground erodes in a recession is not what the supermarket is experiencing.

Sainsbury's is seeing that its customers are largely sticking with the company, but changing what they buy, cooking more and transferring spend from eating out to buying things like family ready-meals, King said.

Despite the warnings of many, Sainsbury's is not feeling the middle ground being squeezed, he added.

He said: "Being in the centre is a good place and you are uniquely positioned to work with customers as they make changes."

He added that the £10 million Sainsbury's has banked for Comic Relief so far this year proved that consumers were not becoming less altruistic.

King said that while his customers genuinely fear for their jobs, those that still have jobs also have household budgets that are under less pressure than they have been for a very long time.

Sainsbury's has conducted research into how different sectors within retail have been affected by previous downturns, and food has traditionally been the most resilient.

He also demonstrated the consistent messaging - "having the "same DNA", as he described it - in Sainsbury's adverts over the years, and over previous downturns.

He said that Sainsbury's focus on cooking and ingredients in its adverts is as relevant today as ever, with more people rediscovering cooking as a way to mitigate the food inflation that has been experienced.

King is keen to provide leadership to his staff and customers with a "glass half-full attitude".

He said that even if 1 million consumers lose their jobs this year, as economists predict, that will still leave 97 per cent of the workforce in employment, and Sainsbury's must continue to serve them.

At the same time, he believes that everything Sainsbury's is doing, with its focus on value, switching to own-label and more home cooking, will be even more relevant to those who are unfortunate enough to lose their jobs this year."

Now, read below (in italics) the Retail Week summary of Tesco's Ms. Bradley from her speech at the conference:

"Bradley said Tesco has been tracking consumers changing confidence, and where as price and fuel inflation were the main concerns last year, this has given way to job security as the biggest issue.

Unlike Sainsbury's chief executive Justin King, who spoke at the conference earlier in the day, Bradley said that she believed consumers are trading down.

She said that this is manifesting itself through them changing lots of little things: consumers doing without a latte, finding cheaper ways to treat themselves and trading off larger purchases such as sofa or a holiday.

Unlike King, Bradley also sees that consumers' concern for ethical matters giving way to price. She says that mums' main concerns right now are providing for their family, and not letting them suffer even when budgets have to be cut.

She defended Tesco's decision to launch its Discounter range, and said that it was done after Tesco had identified a substantial gap in the market between generic branded value products, and big brand merchandise.

She used the example of one customer who had been able to cut her weekly shopping bill in half by moving to the Discounter products.

She said price is where retailers need to start, and so Tesco has focused on reducing the cost of reducing everyday items, and giving customers more price choice for each item they buy.

Finally, she said that it was important to allow customers to retain a sense of fun and treats. Tesco has seen an increased take up of its Clubcard Deals, where customers can exchange Clubcard points for vouchers for days out and other leisure activities.

She said: "It is a way that they can still afford to go out to [places like] Café Rouge. These little luxuries offer huge value to customers."

She also pointed to deals on Finest meals, and entertainment promotions, as other ways the supermarket is allowing its customers to treat themselves."

Reading the summaries of the speeches given at the conference by the Sainsbury's CEO and Tesco's UK marketing chief, one could easily come to the conclusion they aren't talking about the same country or market, if we hadn't told you in advance that they are.

What makes the stark differences in Tesco and Sainsbury's analysis of the UK food and grocery retail marketplace all the more interesting is that historically both supermarket chains have a very similar customer base -- the middle. Neither are discounters like Wal-Mart-owned Asda. Nor are Tesco and Sainsbury's upscale supermarket chains like Waitrose or Marks & Spencer. They are historically mid-range operators.

For example, both competing supermarket chains offer an extensive selection of natural, organic, specialty and premium foods on store shelves alongside conventional manufacturers' and store brands. These natural, organic, specialty and premium products include the retailers' own brands, as well as premium prepared food items, organic produce and meats.

However, because of the recession, Tesco has made a strategic decision to go more discount; to put a much more aggressive focus on price than it has ever done. This decision is largely because the UK's leading supermarket chain (it has a nearly 31% sales market share) has been losing market share points (about 2.5 points in the last 18 months) to Asda and to the small-format, hard-discount German chains Aldi-UK and Lidl.

Sainsbury's on the other hand has resisted getting into the discount game full-force, although it to has been sharpening its pricing, promotions and value offerings, as CEO King said in his speech. But unlike Tesco, it hasn't strategically made a strong price- discount move.

This got us to thinking: Could it be that the main reason the viewpoints of the two executives representing Britain's leading supermarket chains are so differing is because each of the respective chain's has staked out a very different recession strategy and therefore used their speeches at the conference more to defend what each supermarket chain is doing strategically instead of actually attempting to diagnose what British grocery shoppers are really doing in terms of their behavior in these tough economic times?

We aren't making a value judgement on what either of the executives said in their speeches. Rather we're attempting to account for the major differences in how each of them says their supermarket chains view the current state of the British grocery shopper and UK food retailing.
Were Tesco and Sainsbury's radically different formats and food retailers, such an attempt at understanding these differences would be a moot point. But they aren't -- in fact the two chains have far more merchandising, positioning and and operational similarities than they do differences.

Lastly, the explanation could be simple. It's always difficult to attempt to describe consumer behavior in any global way. Perhaps what's happened is Sainsbury's has retained more mid-range shoppers than Tesco has. Therefore, Sainsbury's has yet to see a loss in sales of the same volume as Tesco has because of this possible scenario. So, based on this observation, CEO Justin King's "the center continues to hold" position makes more sense.

And if this scenario is true, that in the case of Tesco it has lost more customers to the discounters like Asda and Aldi, as the market share data tends to suggest, and it needs to win back these shoppers, then it makes sense the retailer tends to see the trading down consumer behavior much more so than Sainsbury's does.

From a macro perspective though, all data in the UK suggests shoppers are trading down when it comes to food and grocery shopping. The Tesco scenario. This is why Aldi and Lidl are the biggest percentage gainers in market share. There's also an abundance of other evidence that the trading down behavior has been going on in the UK for at least a year -- and increasing as the economy worsens.

If Sainsbury's isn't seeing it, that's good news for the chain and its shareholders. But if instead of not seeing it, Sainsbury's is missing it, then that will be bad news for the chain and its shareholders.

But fortunately we have a scorecard to track it. Sainsbury's will soon release its financial results. And new UK market share numbers will also be released soon.

By the same token, is what Tesco seeing, and doing about it, a clear picture of UK shopper behavior? Since Tesco is set to release it financials soon as well, along with the upcoming market share numbers coming out as mentioned above, we will be able to make some analysis of Tesco's approach, as voiced by UK marketing chief Bradley in her talk at the Retail Week conference, soon.

Retail Memo: Morrisons Beats Asda in UK Holiday Market Basket Price Survey... Not Just By A Nose But Also By A 'Mama Mia' DVD

What do whole turkeys, Ocean Spray cranberry juice, After Eight Mints, Aunt Bessie's yorkshire puddings, Ferraro Rocher chocolates, the "Mama Mia DVD and 27 other Christmas holiday-oriented items have in common in the United Kingdom?

Give up?

All 33 items, which also include Hardys Stamp Shiraz-Cabernet, Sauvignon wine, crackers, all the trimmings for the whole turkey and more, were included in a 33 item holiday festival market basket price comparison conducted this week by the United Kingdom trade publication The Grocer.

The British food and grocery industry trade publication compared the retail prices of 33 traditional (we're not sure how the "Mama Mia" DVD got in there though. But more on that later) British yuletide celebration treats at stores run by the UK's leading supermarket chains -- Tesco, Wal-Mart Stores, Inc.-owned Asda, Sainsbury's, Morrisons and Waitrose. In terms of market share, Tesco is the number one chain in the UK, followed by number two Asda, number three Sainsbury's and Morrisons, at number four. Waitrose is about number six or seven, after the Co-op (number five) and about tied with Marks & Spencer, but is considered the country's leading upscale supermarket chain.

The results

Morrisons came in first place in the holiday food, grocery, drink and gift item market basket (or trolley as it's often called in the UK) price comparison.

The supermarket chain is currently selling the 33 typical yuletide treats, including turkey and all the trimmings, crackers, alcohol and gifts, for just £112.06 (pounds).

Wal-Mart Stores, Inc-owned Asda came in a close second place, selling the 33-item holiday trolley basket of goods for £113.32, only £1.26 higher than Morrisons.

Tesco, the UK's top supermarket chain, came in third Its 33-item holiday goody basket costing £117.76.

Purchasing the 33 holiday items at Sainsbury's costs considerably more, £124.85, putting the chain in fourth place, while upscale supermarket chain Waitrose placed last in the 33-item holiday food, grocery, alcohol and gift market basket price survey, with a total cost of £141, which not only is substantially higher (£28.94 more) than winner Morrisons, but also is even much higher than second-to-last place Sainsbury's.

The competition was fierce between Morrisons and Asda.

According to The Grocer, Morrisons has 13 of the lowest priced holiday items on the list, including several chocolate, gift and alcohol items, such as Ferrero Rocher chocolates, Hardys Stamp Shiraz-Cabernet, Sauvignon and the whole turkey.

However, the survey found that Asda fell to second place despite providing 16 of the cheapest or same priced as Morrisons' items - the most of all the retailers. Among these 16 items included After Eight Mints, Aunt Bessie’s Yorkshire puddings and Ocean Spray cranberry juice.

How could this be?

The 'Mama Mia!' effect

It appears Asda's loss fell on on single item -- the "Mama Mia" DVD. The DVD, which we are only now learning is a popular Christmas holiday item in the UK, sells for £2.66 less at Morrisons than at Asda. Therefore, were the DVD not included in the 33-item holiday trolley basket price comparison, Asda would have been the first-place winner over Morrisons.

Non-Abba and "Mama Mia" fans can take this to heart: If you want to purchase only 32 of the 33 items in the price comparison, then Asda is the place to go, as less the DVD consumers can save a few pence getting the other 32 items -- mostly food and drink -- at Asda.

The rumor is, upon reading the results of the holiday market basket survey, in which the only item standing in the way of a first place win for Asda was the Mama Mia DVD, the chain's (fictitious) director of holiday pricing was heard to shout -- "Mama Mia"...and he isn't even Italian. We wouldn't blame Asda if it cried "fowl."

Asda took first place in last year's holiday market basket survey conducted by The Grocer, followed by Morrisons, Tesco, Sainsbury's and Waitrose.

There was no word if the "Mama Mia" DVD was included in the 33-item holiday price comparison last year.

Recessionary food and grocery retailing

The UK food and grocery retailing industry is currently going through a super-competitive period due to the serious recession in the country.

Consumers are flocking to discounters like the German-owned small-format, hard-discount chains Aldi and Lidl. Asda and Morrisons which both operate on a moderate-discount model are holding their owne respectively, and even gaining some market share at the expense mostly of Sainsbury's, Tesco and Waitrose.

Tesco, which has lost some share this year, and is by far the leading supermarket chain in the UK, has recently been fighting back by offering more discounted items in its stores, as well as introducing a new lower-everyday-priced store brand line a few months ago.

Waitrose, the UK's leading upmarket specialty supermarket chain, is hurting probably the most since even upper income British consumers are feeling the pinch from the recession and financial crisis.

Marks & Spencer, which like Waitrose is an upscale food and grocery retailer, and wasn't included in the holiday market basket price survey, also is hurting since its main customer base, which is essentially the same as Waitrose's, also is seeking out discount supermarkets and spending less money on more expensive specialty and premium products at the upmarket chain.

Retail Memo: Latest Sales Figures Show A Flight to Discount Grocers, Including Small-Format Aldi and Lidl, in the UK Market

A no frills, small-format Aldi limited assortment discount grocery store in Spalding, UK, which is in the district of South Holland in the southern part of the county of Lincolnshire, about 110 miles from London, England.

Discount supermarkets in the United Kingdom (UK), including no frills, small-format grocers Aldi and Lidl, are seeing a sales surge as the weakening economy puts a crimp on consumer food budgets in the nation and market.

According to just-released market research data from respected UK international research firm TNS WorldPanel, Aldi- UK experienced year-on-year sales growth of about 19% in the 12 weeks to May 18, 2008, while small-format discount grocer Lidl saw sales growth of about 9%.

Both Aldi and Lidl are Germany-headquartered small-format, no frills discount grocers, offering a limited assortment of mostly store brand (but name brand as well) food and grocery products across all dry and perishables categories.

If the impressive Aldi and Lidl sales gains aren't enough to demonstrate a current shift in UK shopper choices and supermarket preferences in the price-impact retailer direction, two other price-focused discount grocery chains, Iceland and Farm Foods, also posted double-digit sales gains over the same 12 week period, according to TNS WorldPanel data.

One the other hand, Tesco, which is the leading food and grocery retailer in the UK, and Sainsbury's, the UK's number three supermarket chain, saw slight decreases in sales during the same period.

Aldi, which currently operates 300 of its limited assortment, price-impact, no frills small-format discount grocery stores in the UK, was the clear sales increase winner, according to TNS WorldPanel director of research Edward Garner. According to Garner, Aldi's 18.9% sales gain for the period translated to sales of ~577 million pounds.

Even more impressive, the grocer's market share rose from 2.5% to a current 2.8%, says Garner.

While a 2.8% share of the market isn't much in the grand scheme of things, compared to number one Tesco's 31.1% for example, Aldi continues sales period-after-sales period and year-after-year to grow its share of the market in the UK. Further, with only 300 stores, Aldi has about 20% of the total store count in the UK as Tesco has, and only slighlty more than that compared to number two Asda and number three Sainsbury's.

Aldi currently is in a major growth program in the UK, with plans to at least double the number of stores it has in the nation over the next 4 -to- 5 years.

Lidl also is growing its store count aggressively in the UK, and has shown regular sales increases, although not as high as Aldi's, for the last few years.

After Aldi, the next best performer for the 12-week period ending May 18 was Iceland, according to the TNS WorldPanel data. The price-impact grocer's sales increased by a healthy 12.2%, to ~352 million pounds for the sales reporting period, according to Gartner.

This is significant because Iceland hasn't been a player of note in UK food and grocery retailing. However it appears the current economic downturn in the nation, which is leading shoppers to choose more price-focused supermarkets, is benefiting the fledgling discount food retailer.

Farm Foods, another discount grocery chain that hasn't been much of a player historically in the market, saw its sales increase a significant 10.7%, to reach ~100 million pounds, a record for the price-focused supermarket chain.

Small-format discount grocer Lidl had the least sales increase of the four price-impact discount grocery chains. However, at 9.6% the German fighting tiger small-format grocer wasn't too far behind. Lidl's sales for the period were ~478 million pounds, not all that far behind Aldi's considering Lidl has fewer stores in the UK than fellow German grocer Aldi.

Despite the worsening economic conditions in the UK, taken as a whole the nation's supermarket chains still did fairly well, with sales up 6.6% overall in the 12-week period, according to TNS Worldpanel research director Garner.

Sector leader Tesco PLC saw a slight drop in market share of 0.2%, to 31.1% of the total food and grocery sales market, but still turned in period sales of ~6.4 billion pounds, which is a 6% year-on-year sales increase.

UK industry researchers and observers do say they are seeing a current shift from the mainstream supermarket sector--chains like Tesco, Asda, Sainsbury's and Morrisons--to price-focused discounters like Aldi, Lidl, Iceland and Farm Foods, with a particular shift to Aldi.

TNS Worldpanel's Garner says Aldi's heavy investment in new stores "is being rewarded with strong growth in the current climate."

"This is virtually solely fuelled by new shoppers visiting the stores rather than existing shoppers spending more," adds Garner in offering his estimation about UK shoppers' trending towards discount grocers like Aldi.

Aldi and Lidl are the two best positioned to grow their store counts and capitalize on it if this trend by more shoppers to shop discount grocers continues or increases. Both German chain's are heavily capitalized and growing rapidly internationally.

In fact, Tesco is so concerned about the threat from these two fighting small-format tigers it's currently in the process of designing its own small-format, limited assortment, no frills discount grocery chain in the UK.

Tesco operates the small-format Tesco Express format throughout the UK. But those stores are more of a hybrid neighborhood grocery store/convenience store rather than a no frills, price-impact small-format retail format. Therefore, they don't compete for the same general market that Aldi and Lidl do.

However, since Tesco's internal research started showing a couple years ago the Aldi and Lidl stores were cutting into sales in all its formats, the giant retailer decided to create its own small-format discount grocery store format. There's no word as to when the first store of the new format will open in the UK. Most market observers though say the first one should open by early next year if development continues on track. Tesco isn't currently talking about the project.

It's going to be interesting to see if the sales growth trend which currently is favoring the price-focused retailers in the UK continues into the next reporting period.

Most economists don't expect an improvement in the nation's economy for the rest of the year, so the climate and conditions should remain steady for a repeat perhaps of this period's sales numbers and direction. If not, perhaps the movement towards the price-impact food retailing sector in the UK will then be seen to be more of a fad than an actual trend.