Co-operative retailers have several reasons to be concerned about Brexit, according to James Walton, chief economist at research charity IGD.
Mr Walton was a keynote speaker at the Co-operative Retail Conference in Stratford, an event organised by Co-operatives UK. He thinks Brexit is the most immediate challenge for co-op societies but believes it is concealing other challenges that will stay regardless of the outcome of the negotiations. “Overall, the UK environment will remain very difficult,” he predicted.
One important factor in determining the future of co-op retailers is market access. “The whole supply chain is a product of our involvement in the EU,” he said, adding that it was not certain that Brexit negotiations would be made in two years. Mr Walton thinks that all possible post-Brexit trade deals would be less favourable to the current free trade deal the UK has.
“Some tariff barrier is going to appear between the UK and EU,” he said.
Other Brexit related factors affecting the retail sector would be the depreciation of the pound, potential constitutional changes in Scotland and Northern Ireland and the end of Common Agricultural Policy (CAP) direct payments for British farmers.
“British farming was built upon the assumption that the CAP will apply – a lot of farms are not profitable. There will be some sort of structural adjustment in farming and if you are in the business of buying food that’s something to watch out for,” said Mr Walton.
The increasing public dissatisfaction driving political change should be another reason of concern for the retail sector, he argued. People perceive big businesses as ‘establishment’ and co-ops could be seen as part of it, he warned.
In a 2016 article for Forbes magazine economist Patrick W. Watson of Mauldin Economics described a 3D future of debt, de-globalisation and dogfights. Disillusionment, democracy and disobedience could also be added to the list, said Mr Walton.
What could this mean for co-ops?
He explained how most businesses had been created with the idea in mind that globalisation would last. In an interdependent sector such as grocery, the end of globalisation could pose a great challenge. The UK imports one third of its food.
“There is a cultural and political split between citizens and political leadership. Some people identified this as a global system no longer working for people, but for the elite,” said James Walton.
In terms of retail trends, he identified a main tendency for the UK sector – consumers drifting away from supermarkets, favouring discounters, convenience stores and online shopping.
Over the past three years consumers have seen prices going down but inflation is going to end the unprecedented deflation period. With food and drink inflation returning the role of buying groups such as Federal Retail and Trading Services Limited (FRTSL) – owned by UK co-operative societies – will be crucial in driving organisations to hold prices back, said Mr Walton.
Co-op retailers can respond to these challenges by focusing on the tangible aspect of products and developing shopper interest and affection. According to Mr Walton, IGD research shows that convenience stores score highly in terms of emotional engagement but online shopping outperforms them.
“Online shopping has a structured approach, the website welcomes you, it is easier to keep track of shopping and make savings,” he said. Discounters also perform well when it comes to emotional engagement.
“Discounters have shown they can do values. So shoppers have been told they don’t have to compromise on ethics to get the savings they want,” added Mr Walton.
Co-ops currently make up 6% of convenience stores in the UK, the sector being controlled by independent, non-affiliated retailers. Mr Walton thinks convenience will continue to grow and so will disrupters. These include online only businesses with limited facilities but simple and providing easy access for customers to acquire food in a hurry. His advice for co-op retailers is to make big stores more shoppable by redesigning and using technology to speed up shopping.
“The technical change we’ve seen up to this point is the tip of the iceberg. Shoppers are not loyal to convenience store concept, as long as something else comes along,” he warned delegates at the retail conference.