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A curated content platform of COVID-19 news stories with a supplier-retailer lens by Advantage Group.

Edition 9 – June 3, 2020

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FEATURED STORY

Mixed Fortunes for Discounters

Since the pandemic took hold, the vast majority of food consumption has taken place in people’s homes. Following this trend, the grocery sector is the one area of consumer spending that has experienced a significant boost in sales.

Summary

The degree to which different retail channels have captured their share of growth has varied by geography. E-commerce is the exception, which has almost unilaterally experienced a surge in demand in all locales.

In Italy, larger retail formats lost out to their smaller counterparts as they tend to be located farther from city centres and were adversely impacted by travel restrictions. Keeping in mind that COVID-19 hit Italy especially hard in terms of fatalities, Italian shoppers also preferred to frequent smaller shops within their immediate neighbourhoods as they felt less vulnerable in more familiar local stores.

In Germany, super and hypermarket formats with larger assortments saw the greatest hikes in traffic, as German consumers cut down on the number of separate shopping trips that they took each week, opting to purchase all necessities in a single visit.

Perhaps no channel has experienced more ups and downs than discounters, with various factors impacting their fortunes in different directions. With unemployment on the rise and food prices increasing, consumers are on the hunt for the lower price points that discounters offer. Discounters throughout Europe and North America are also predominantly located in closer proximity to households than conventional hyper and supermarkets and are therefore perceived as a more appealing option to maximize convenience. Smaller store sizes and more densely populated locations may, however, serve as a disadvantage as a narrower range of products and fewer parking amenities prohibit their ability to act as a one-stop shopping destination. Less square footage also caps the customer count and limits the flow of shoppers that can be hosted at any one time whilst adhering to social distancing guidelines.

Finally, despite investing in omni-channel capabilities in recent years, many discounters still lag behind conventional grocers in terms of fulfillment, home delivery and click-and-collect infrastructure and functionality.

Trading Down

The 2008 financial crisis was a boon to the expansion and evolution of the discount grocery channel, as consumers sought out lower prices and were drawn to the value-for-money appeal of discounted private label. Retailers such as Aldi and Lidl, with a proposition built on value and a simpler shopping experience, increased their footprint throughout Europe and North America. Concurrently, variety store discount chains in the US, such as Dollar General and Dollar Tree, extended their range to include more food and consumables and began usurping share from conventional grocery retailers in these categories.

In the US, when the COVID pandemic first took hold, larger format retailers saw higher levels of traffic as shoppers stocked up on essentials. As the weeks passed and job losses and food price inflation mounted, concerns shifted from empty pantries to empty wallets. For many, price rather than assortment became the primary influencer on where to shop. With uncertainty over if and when a full economic recovery is set to take place, analysts believe that much like the years following 2008, we could witness a “trade-down” economy for the foreseeable future.

Since 2008, US variety store chain Dollar General has been on a massive growth spurt, doubling its footprint from just over 8,000 stores to more than 16,000 locations by the end of 2019. The retailer opened an additional 250 stores in Q1 of this year and has stated that it is on track to open an additional 1,000 stores by year-end. With conveniently placed locations for shoppers wanting to limit their travel to larger stores during the pandemic, first quarter sales grew by 27.6%; outpacing the growth of market leaders such as Walmart, Costco, and Kroger.

In April, the Consumer Price Index for food in the US experienced its largest monthly increase (1.5%) since 1974, with meat, poultry, fish and eggs leading the way at 6.8%, followed by dairy (5.2%) and non-alcoholic beverages (5%). In late May, Jason Hart, the CEO of Aldi US, issued a statement to their shoppers assuring them that the retailer is committed to maintaining its everyday low-price promise. The German hard discounter today operates 1,900 supermarkets in 35 US states and is projected by 2022 to become the third largest supermarket chain after Walmart and Kroger. Aldi has taken a similar tactic in Australia, launching a television campaign to highlight what they are doing differently to ensure that prices are kept low.

Assortment and Size

Many shoppers are stocking up on more items than usual during their primary shopping trips in an effort to eliminate the need for top-up or emergency shopping. Conventional supermarkets tend to carry a larger range of products for shoppers looking to attain all of their groceries in one visit. Private label can account for up to 90% of SKUs in grocery discounters, leaving shoppers with less variety.

European sales figures over the course of the pandemic show conventional supermarkets in the UK and Germany outpacing the growth of discounters for the first time in many years. In the 12-week period leading up to May 16th, Tesco and Sainsbury, the UK’s two largest supermarkets, saw sales growth surpassing discounter Aldi for the first time in nearly a decade.

Larger conventional supermarkets also allow for a lower density of shoppers in-store, providing customers with a greater sense of safety and comfort. In the US, Aldi stores average approximately 12,000 square feet in size, whereas an average Walmart supercenter is almost 15 times larger at 178,000 square feet.

To help alleviate shopper anxiety at their European outlets, Aldi has introduced a “digital traffic light” at store entrances that keeps track of the number of shoppers entering and exiting the store to alert arriving shoppers when it is “safe” to go in.

Another challenge for discounters is that their low-cost business model requires them to operate under much thinner margins, making it difficult to absorb COVID-19 related operating expenses related to wage increases and in-store safety and sanitization measures. Dollar Tree, a US variety store chain, has stated that it will focus on selling more higher-margin discretionary goods such as stationery and crafts for the remainder of the year as a means of recovering margin.

Digitally Behind

The outperformance of conventional supermarkets over discounters in major European markets has also had to do with their ability to expand their home delivery and click and collect capabilities more rapidly. Discounters thrive on simplification and keeping expenditures down, whereas e-commerce fulfillment requires complex and costly investments in digital technology.

E-commerce also requires scale, and according to an analysis by Goldman Sachs, the average basket size for Dollar General and Dollar Tree is between $8 and $13, making it less profitable for the two discount chains to invest significantly in their own home delivery infrastructure. Dollar General only offers online delivery in non-perishables, while Lidl (via Shipt and Boxed) and Aldi (via Instacart) only make online ordering possible through third party delivery services that they have partnered with.

In the UK, Aldi is currently trialing a partnership with online food delivery company Deliveroo that could be rolled nationally by the end of the year. Lidl, meanwhile, has partnered with iForce, an online logistics provider that also works with Tesco and Waitrose.

Advantage Perspective

Whilst the pandemic is causing many shoppers to re-prioritize what goes into selecting where to shop, these criteria will always vary based on the shoppers unique set of circumstances. Some will feel more secure in a larger big box format, others will favour a smaller, neighbourhood store that they are more familiar with. Still, others may opt to avoid visiting stores entirely, patroning the websites of omnichannel retailers that are able to deliver direct to their homes.

Undoubtedly, we are set for a prolonged economic recession, which will place discounters at an advantage as many shoppers’ financial fortunes will force them to “trade down”. Price alone, however, will not equate to success. The ability to leave the store with more of one’s shopping list checked off is a practice gaining increased importance. The ability to order items online also offsets the frequency required for making in-store visits.

The discounters that are likely to prevail are those who continue to expand their assortment beyond a limited number of private label products, invest in online fulfilment capabilities and seek to overserve consumer needs in the post-COVID world.

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Voices on the Ground

This week we speak with Dylan Piatti, Managing Director for Advantage Africa, to understand how COVID-19 is impacting life and retail in South Africa.

Part of the lockdown restrictions have included no sales of alcohol, as well as limitations on what can be sold via retail channels. For the grocery sector, only government allocated “essential items” could be sold to shoppers, which meant that many shelves were cordoned off as non-essential goods. The impact of this was significant for both suppliers and retailers as they tried to manage supply chains and sales expectations given these restrictions.

 

For example, the initial lockdown created panic buying from consumers generating unprecedented demand for specific goods such as toilet paper and baking items. The challenges for category sales have impacted some FMCG players to the extent that they have realized less than 20% of projected revenues for this period. The closing of schools, restaurants and leisure facilities has adversely effected beverage sales. For alcoholic beverage suppliers, the export market was also initially closed due to road transport safety concerns, so alcoholic beverage suppliers lost both retail and on-trade sales. Talking to a large retailer recently, they expressed how fruit juice sales have been disappointing as they have no “lunch-boxes” to fill. With fewer shoppers, restrictions on the number of people in a store at any time, and social distancing protocols implemented in checkout queues, impulse buying has dropped with the hardest hit being the chocolate and snack suppliers.

 

The CPG industry response has taken a human-centred and people-first approach. As a result, improved safety measures for staff have been paramount. These have been followed by adjustments to specific category fulfillment focus. The latter has led to interesting developments in supply chain innovation in attempts to find pockets of value through efficiencies.

 

As we pivot (as of 1 June) into a lowering of the restrictions, alcoholic beverages are now allowed to be sold, however, bars, restaurant and entertainment venues remain closed. All retail items can be sold in-store without restrictions. One might think that this means business as usual – however, the impact of supply chain adjustments has garnered learnings that have accelerated digital transformation of process, planning and delivery as well as investments in logistics-as-a-service.

 

The severity of lockdown in South Africa meant that there was no time for suppliers to adjust to try and eck out as much revenue as possible. The luck of the draw being which category you play in – with home, personal and baby care seeing some of the best results, along with bakery goods. The ramifications on CPG business from nine weeks of hard lockdown mean that significant rationalizations have taken place - what this means for the mid to longer-term for capacity to fulfill and serve customer expectations remains to be seen.

Talking to a personal care, baby and home care supplier recently, they expressed how they wished they had invested in e-commerce capabilities over a year prior. In 3 months, they had realized 600% growth month on month in e-commerce revenues. A major retailer’s senior buyer informed me that one of their banners that had little to no e-commerce sales pre-COVID had realized 450% increase in online sales.

 

The ramping up has been significant but approached in different ways – those in one camp who had no choice to react and invest, those that had already started on the journey who accelerated their development and those who were focused on online and were able to pivot into additional revenue streams.

 

Innovations include new partnerships between pure play online companies to provide logistics support to brick and mortar retailers. It has also seen the rise in prominence of online grocery shopping services, both retailer-owned and one-stop service providers aggregating across retailers. Additionally, we have seen restaurants become online food delivery companies, breweries become soup kitchens and sanitizer producers and clothing retailers become locally sourced online grocery suppliers.

The downgrade was already going to put pressure on the CPG and retail industry, especially given the challenges that consumers are already facing in a highly indebted economy. Escalation in basic commodity prices will have lasting effects across the CPG and the retail sector, however, if we are able to scale-up local production of basic inputs this might be slightly mitigated. Government has created a Solidarity Fund with contributions from big business and the wealthiest in society aimed at bringing some financial relief to small and medium enterprises, specifically those generating employment. However, this is not enough to support these businesses sufficiently and we are seeing several closures with an increasingly adverse effect on an already disastrous unemployment rate of over 35%. There will be pressures across the board, however, I do believe that this will drive business innovation and further efficiencies. How long the impact will last for is anyone's guess.

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A Pulse on Big Brands

Overall Rating

4.6
4.6 rating
4.0 rating
June 11, 2020

Very informative

4.0 rating
June 11, 2020

With Covid 19 , much has changed in the retail industry with regards to disposable income and consumer purchasing decisions. The last 3 moths more people have been consuming more food products at home however we for a major shift with regards to peoples economic circumstances.

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