Lessons to learn from competition in retail business


  • Business
  • Saturday, 05 Oct 2019

I was in London two weeks ago for my medical procedures when my wife showed me a newspaper article from The Evening Standard on an announcement by the CEO of Sainsbury on his future plans on store consolidation. So I decided to text the CEO, Mike Coupe, if he could spare some time for an interview.

Mike and I were classmates in the same living group that attended the Advanced Management Program (AMP 182) in Harvard Business School back in 2012. He was the group commercial director at the time and I remembered our long standing arguments on the bullying tactics of chain store buyers on their suppliers.

Being a supplier to chain stores throughout my trading life, I would inevitably be on the losing side of the argument as we depend on the stores for the last mile connection to consumers. For the last 40-50 years, the alternative to retail stores distribution have been multi-level marketing /direct marketing, mostly high value products like Amway etc with the exception of Avon, mass market low priced cosmetics.

In the clothing and cosmetics business, we have also seen the emergence of the brand owners opening their own retail stores in the last 20 years or so. In the last 15 years, e-commerce players like Amazon and Alibaba have transformed the clothing and general merchandise landscape using digital platforms as an effective distribution channel as compared to retail stores.

But grocery sales especially fresh food supplies are very different. This distribution channel is difficult to disrupt for obvious reasons. Location, convenience, low priced necessities and fresh food with short shelf life are difficult barriers for a full online competitor to overcome. In UK, Ocado, an independent online grocery, is the exception as they have grown to a £1.5bil revenue company and growing at 10% pa.

The secret to Ocado’s growth is their partnership with physical stores like Waitrose and starting 2020, a partnership with M&S Foods. Just like any digital startups, Ocado has been and still is losing money. Even though they are listed and have a market cap of £6.6bil, they are typically stating that they are ebitda positive but profit negative. No online grocery stores will progress without physical store fulfillment support. Hence Amazon”s purchase of Wholefoods stores in USA for the last mile fulfillment promise. Tesco, Sainsbury and other grocery retailers have also join in the bandwagon by offering same day deliveries to homes via online orders.

Sainsbury PLC has three business division, Sainsbury Supermarkets, Sainsbury Argos and Sainsbury Bank. Sainsbury bought Argos, a catalogue general merchandise chain store for a reported GBP 1.4 billion in 2016. Last year, Sainsbury and Asda (owned by Walmart) agreed on a GBP 12 billion merger deal that was not agreed upon by Britain’s competition watchdog - Competition and Markets Authority, UK.

In 2018 Sainsbury employed 186,900 staff. HQ staff strength about 8,000 people of which 10% are data analysts. Full financial year Mar 2019 revenue was GBP 29 billion ( RM150bil) excluding VAT. Operating profit was GBP 635 million (2.2% trading profit) whereas after exceptional item profit after tax was GBP 219 million (0.7%).

Compare it with the biggest retailer Tesco PLC, which has a staff strength of 350,000, UK sales of GBP 51.6bil (RM268bil), operating profit of GBP 1.53 billion (2.96% trading profit).

If the merger between Sainsbury and Asda is approved, the combined entity would overtake Tesco as the biggest retailer in UK.

The German Discounters Aldi and Lidl have gained 1.4% and 1.1 % respectively over the last 5 years at the expense of the supermarket operators. Even more significantly, it has lowered grocery prices across the board for all grocery retailers.

When asked about the rationale behind the merger exercise with Asda, Mike replied that there was a potential savings of 10% on sourcing due to the combined volume of purchases.

For the grocery business, with a trading profit of 2.2%, that would mean they will have a higher trading profit and they will be much more competitive against the discounters. In addition, the cost savings from the synergy would improve their bottom line significantly. As the biggest retailer group with a combined 32% market share, Sainsbury and Asda would cause countless sleepless nights among its suppliers.

Instead, Mike had to announce a consolidation plan for its store estates by announcing a potential savings of GBP 500 million over the next five years. Sainsbury had a store estate of 1,423 stores of which 815 are convenience stores. Argos have 844 stores.

Mike’s latest plan was to close 70 Argos high street stores, 15 supermarkets and 40 convenience stores. However, Sainsbury will open 10 new supermarkets and 110 new convenience stores. 80 Argos stores will be relocated into Sainsbury Supermarkets. Basically convenience stores have grown tremendously and are more profitable (lower operating costs) and they are highly suitable for city centre customers.

There are many lessons that we can learn from this competitive landscape.

The retail business of brick and mortar grocery will still be a viable business. However supermarkets should strengthen its capabilities in terms of online orders and same day delivery.

Changing habits by consumers to buy in smaller quantities and more frequent transactions means convenience stores near you will be your location store of choice for daily necessities.

The growth of our local Speedmart 99 has been tremendous. It now has over 1,300 stores and is growing at a tremendous rate. Giant has closed down many hypermarkets over the last three years as consumers find that they can pay same everyday low prices without having to buy in bulk from hypermarkets.

Small convenience stores would normally mean a two shop lot operation that will result in limited shelf space for many brands. Only top brands and limited sizes will be made available for consumers. Manufacturers and brand owners will be hard pressed to list their products into Speedmart 99 and Seven Eleven stores due to ASTROnomical listing fees and the shortage of shelf space. Eventually the top brands will get bigger and house brands will be the only avenue for manufacturers to enter these outlets despite the razor thin margins.

Product range will be reduced to only fast moving sizes that justifies its place on the shelf.

Manufacturing capacities will be managed and driven by data analytics provided by retail store numbers. The role of marketeers will be somewhat reduced and have to be complemented by data analyst in product development and merchandising needs.

The competitive push for low prices everyday would mean a much more efficient supply chain which would mean a more direct approach from producers/farmers and manufacturers to the last mile retail stores. Distributors and middleman operators will be continuously squeezed off the market as the competition for consumers intensifies.

UK now imports 30% of their fresh foods from the European Union and the Brexit issue has caused tremendous headache to all the grocery retailers. For instance, fresh tomatoes are imported from Spain on a daily basis and once the custom checks are implemented at the British border, Mike anticipates that there will be a one day delay for the tomatoes to arrive into the distribution centers which means one day less fresh tomatoes that only have a shelf life of 4-5 days. There will be a cost increase in terms of additional forwarding, transportation costs and wastage costs that will be passed on to consumers.

In Malaysia, our supply chain of fresh food has yet to be weaned off its inefficient operations and still have many fat layers in between especially the cartel of vegetable wholesalers from Cameron Highlands. The wet market vendors work on high margins hence the high inflation of fresh food over the last 5 years. If they are not careful, they will be disrupted by these chain store supermarkets and convenience stores who will be able to source direct from the farms, fisherman/ fish breeders etc.

We will continue next week with comments from Mike Coupe on why Sainsbury employ 800 data analyst, how Argos will compete with Amazon on the general merchandise space and how he views his job as a CEO in a very transparent public listed company in UK.

While you are reading this article, I am probably with my wife at the wet market in PJ haggling over the high price of fish and prawns with my fishmonger lady. Happy shopping!

The views expressed are the writer’s own.


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