Where will the grocery market be in five years time – and how can co-operatives adapt? These were the questions addressed by IGD Retail Analysis‘ chief economist, James Walton, in the first session of Co-operatives UK’s 2016 Co-operative Retail Conference.
Mr Walton has worked across the entire grocery industry as well as with non-industry groups such as government departments and NGOs. He joined IGD in April 1999 and became chief economist in 2004, now helping businesses anticipate and cope with strategic events, including economic pressures, geo-political change, social development and environmental stress.
“There is change on the way,” he told conference delegates in Stratford-upon-Avon.
Mr Walton described the unprecedented 19 consecutive months of deflation currently seen in food and drink prices on the high street, something not observed since data collection began around the time of the Second World War. The clear problem of this deflation being, if prices are relentlessly going down, how can retailers meet their targets and sustain themselves?
It also affects shoppers’ behaviour. “Shopper value expectations are being reset,” he said. As low prices become normalised, shoppers become ‘trained’ to expect better goods for less, and online stores set a new standard in choice and value. Around 44% of people now believe they can get the same – or better quality – goods for the same or less money than in the past.
Mr Walton also spoke of the potential knock-on effect of the government’s National Living Wage, applicable from April, which introduces a minimum wage premium rate of £7.20 per hour for staff over 25 years old. The cost of wages remains the biggest outlay for employers, and a trend of tumbling prices and increased wages is clearly unsustainable. He warned of a possible ‘ratchet effect’ over the next three to ten years that could catch out employers.
A possible change to trading hours is another area where co-ops must adapt to survive. A limit to Sunday trading for larger supermarkets has traditionally been helpful to smaller stores, such as co-operatives, who are able to open for longer. Government proposals to allow councils to extend Sunday opening hours have been opposed by co-ops, including Midcounties, and on 9 March, the Commons voted against the proposals. But if this changes in the future, co-operatives could lose their Sunday advantage.
However, this doesn’t all spell bad news for co-operatives and smaller retailers. Figures show that none of the major supermarkets are growing quickly; everyone is adjusting to compensate in a changing marketplace, said Mr Walton. “Growth is being grabbed by Aldi and Lidl. The volume is moving into the low cost areas.”
Alongside the discounters, another area of growth is in convenience stores, where the Co-operative’s food stores are ranked third, amid continued expansion. There are now 46,000 convenience stores in the UK and the 7.3% growth of co-operatives’ sales in 2014-15, despite the continual reduction in prices, was signalled as an ‘extremely strong performance’.
Mr Walton did have words of warning though, as Aldi and Lidl have announced plans to open up convenience branches. He advised smaller retailers to look at why people shop there: it’s all about the staple goods, he said. “Fruit and vegetables is the area where co-ops can differentiate themselves.”
Despite the apparent good news for the consumer, weak inflation has contributed to household wealth figures being back to pre-banking crisis levels. Mr Walton argued this could be taken two ways; either as a move in the right direction, or a point where it’s taken eight years to make no progress at all.
But shoppers are apparently still cautious, and feel that the level of risk remains high. Broader political issues such as the EU referendum, a potential second referendum on Scottish independence, conflict on fiscal policy and infighting within political parties have all added to an atmosphere of instability.
Looking five years into the future, said Mr Walton, there is a very real possibility of the UK no longer being part of the EU. This means key business decisions are currently being put on hold. If the UK leaves, a lot will depend on ‘the goodwill of remaining EU members’. Leave on good terms, and trade relations could remain healthy. Leave on bad terms, and the UK could find itself banished into ‘trade wilderness’.
Mr Walton ended the session by looking even further into the future, and the ways in which technology could affect retailers. He cited robotics and AI as very real possibilities – for example helping data analysis and automatic reordering of products when they run low in households. Driverless vehicles for long haul trucking also seems another likely area of investigation and trialling as the industry prepares for changes radical enough to be deemed a ‘fourth Industrial Revolution’.
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