The UK’s two biggest quoted grocers released updates last week - both provided an interesting snapshot of the state of affairs for the two retailers. Rebecca Thomson charts how each has evolved and where they might go next.

Sainsbury's/Tesco

From Sainsbury’s continued ability to chime with today’s consumer mindset to Tesco’s leadership in the multichannel arena, the grocers’ recent updates represented everything that we’ve come to expect from the UK’s two biggest quoted supermarket groups of late.

Their defining characteristics have changed significantly over the past two years. Tesco’s aggressive property-fuelled growth over the past 20 years left Sainsbury’s floundering in its wake. Now, Sainsbury’s has become a recession-beating, market share-growing, Paralympics-sponsoring success, whose focus on values has struck a chord with shoppers.

Tesco, meanwhile, has halted the space race, instead morphing into an innovative multichannel leader - a strategy that will set it up for the future, but in the meantime it is battling to turn around the UK business following a profit warning two years ago.

But size still matters for Tesco - it is by far the biggest retailer in the UK, and it is using its clout to good effect as it continues to invest and expand.

When it comes to domestic growth, Sainsbury’s seems to have it all tied up, while Tesco is repositioning its international business to focus on returns. Last week it confirmed its joint venture with food retailer China Resources Enterprise. It will take a 20% stake in the company, but Kantar Retail director of retail insights Bryan Roberts says the deal illustrates how difficult expansion into the BRIC countries can be.

Tesco also leads the way in digital innovation. Its latest venture, its own-brand £119 Hudl tablet, is potentially a hugely significant step for the grocer.

The multichannel juggernaut is laying the foundations for a very different shopping environment in the future, and its progress is impressive.

But while their strengths tend to lie in different places, one area the two grocers are certainly aligned on is the consumer.

There are challenges on the horizon for both retailers. Sainsbury’s will have more work to do on perception of its prices as it opens more stores outside London and the Southeast, and will need to focus on finding a successor equal to Justin King in the long term.

There is still a lot of work to do on Tesco’s UK turnaround and it isn’t plain sailing in its international markets. But it’s an interesting moment to take a snapshot of the two grocers - a lot has changed in the past two years.

Tesco’s Chinese deal exposes the difficulties of BRIC entry

  • Bryan Roberts, director of retail insights, Kantar Retail

It might finally be time to put one of the great myths of global retailing to bed. Contrary to popular belief, the BRIC markets are actually a bit rubbish. OK, I may be oversimplifying things slightly, but this observation is certainly the case when it comes to grocery retailing.

Russia has been problematic for many global players - Carrefour completed both market entry and market exit in what must be a world record of four months. Tesco has never ventured there and Walmart has been frightened off by, ahem, some of the cultural nuances of doing business there. India, meanwhile, has been a total non-starter for the global grocers, with activities so far limited to disappointingly modest cash and carry operations.

Brazil might be the only exception. Casino and Carrefour are thoroughly enjoying themselves in what continues to be a benign market, although Walmart is not exactly motoring as it struggles to integrate a couple of acquired businesses and complete its transition to everyday low prices. Which leaves us with China - by no means a happy hunting ground for global players, both in food and non-food retail.

The star of the show has been Auchan, which is seeing all sorts of growth through its local partnership there. Carrefour has found the going tough, Walmart is growing at a glacial pace after a botched acquisition and Tesco has certainly found that the market is not exactly a walk in the park.

Local businesses, with former or ongoing state backing, have found progress much easier. Relationships with both central and local government are a vital component of success in the market, as is the ability to use scale and local expertise to collaborate with indigenous and global suppliers. Western retailers have faced massive learning curves in terms of tweaking their offer and assimilating local shopper habits, while critical mass, economies of scale and profitability have proved to be stubbornly elusive for many entrants.

While words such as ‘retreat’ and ‘exit’ are being bandied around Tesco’s new joint venture with CRE in China, I believe that this move will be regarded in the future as something of a masterstroke. Tesco transitions from full control of a relative minnow to a 20% stake in a highly successful market leader in the world’s largest consumer market.

The combined entity’s skillset in terms of local clout and expertise and global best practice will be formidable, a union that should lay the foundations for not only dominance, but sophisticated multichannel leadership in one of the world’s key grocery retail markets.

Sainsbury’s home market success

Sainsbury’s has now enjoyed 35 consecutive quarters of growth in like-for-like sales. Its strong own-label brands, the rise of convenience - which enjoyed 20% growth in the second quarter - and online all contributed.

Cantor Fitzgerald retail analyst Mike Dennis said Sainsbury’s success is in part down to market trends. “This highlights the polarisation in the UK grocery market, with the quality own-brand operators such as Sainsbury’s and Waitrose growing ahead of the market and the value- orientated discounters like Aldi and Lidl growing faster at the other end, while the mid-market brands of Tesco, Asda and Morrisons are all underperforming.”

Oriel analyst Jonathan Pritchard said: “It is interesting to note that basket size has risen in each of the retail formats.

We’d have expected that in convenience stores, but not necessarily in larger outlets or online, so clearly Sainsbury’s offer is resonating with customers.”

He added that Sainsbury’s growth is doubly impressive given that lower-priced, own-label items are growing much faster than branded goods.

George Scott at Conlumino points to Sainsbury’s focus on quality and its close relationships with food producers as factors that have helped it thrive. The grocer wasn’t implicated in the horse meat scandal and has curated a reputation for quality, while also using its Brand Match promotion to ensure shoppers think of it as affordable.

The stars are aligned for Sainsbury’s at the moment - its success of the past few years is continuing and shows no sign of abating just yet.

Tesco’s multichannel achievements

One of the biggest advantages Tesco has developed over the past couple of years is its ability to try new things without fear of failure - something few have managed.

That has led to a stream of interesting ideas from the retailer. The Hudl tablet, launched last week, has been attracting headlines with its affordable price tag, but it is more than just an intriguing new product for Tesco.

It is the first time a traditional retailer has positioned itself as a digital media company, with own-brand hardware at the centre of a self-created digital ecosystem. The only other retailers to take this route have been Amazon and Apple, and with Tesco’s wide range of products, loyalty data and stores at its disposal, its potential scope is in some ways much greater, if it can develop enough scale.

Tesco said of the device in its first-half results statement: “Hudl is tailored around customer needs and ease of use with instant access to our full range of digital services, all in one place - these include Blinkbox movies and music, Clubcard TV, banking and of course shopping for groceries, clothing and general merchandise, as well as other popular pre-loaded apps such as YouTube, Google Maps and Google Play.”

Hudl is not the only innovation to come from the grocer - drive-thru click-and-collect and scan as you shop services have both made their mark.

There are now nearly 200 click-and-collect drive-thru collection points and an additional 40,000 UK customers have signed up to Tesco’s Delivery Saver subscription schemes in the first half.

Scan as you shop has also done well - more than 300,000 customers use it each week, and for stores where it has been introduced more than 20% of sales are made through the technology.

But linking up legacy systems at one of the world’s biggest companies is a huge challenge. There were few mentions in its latest results of the scale of the behind-the-scenes work required - just an acknowledgement that the work is ongoing. “We have continued to invest in improving the integration of our customer offer across all of our store formats and channels,” it said.

But the supermarket is clearly confident it will continue to lead the way. Its report said: “As the retail industry evolves and we deliver our objective of being the leading multichannel retailer, strengths such as our IT capability, own-brand expertise and ability to transfer management skills across the group will become even more important competitive advantages.”

Tesco’s multichannel efforts aren’t limited to the UK either - it offers online grocery in more than 50 cities across nine markets outside the UK, and online sales were up 13% in the UK and 54% overseas.

It will also open its sixth dark store, in Erith, later this month to support growing demand for online grocery shopping in Greater London. “Our Erith facility will build on the learnings from our openings to date, with an increased level of automation and, as a result, a greater capacity in terms of the volume and number of orders.” Tesco now holds a 47.3% share of the online grocery market, according to Kantar Worldpanel data for the 12 weeks to September 15.

However, beyond online grocery, Tesco has had a tougher time in etail. Despite forming a “key part” of its multichannel strategy, sales at online non-food site Tesco Direct have fallen as it overhauled the range of its in-store general merchandise. But on marketplace Sellers at Tesco, third parties have now uploaded more than 200,000 products since year-end as Tesco attempts to put the channel’s sluggish growth behind it.

Under multichannel boss Robin Terrell, poached from House of Fraser in January, Tesco’s transformation to face the digital age looks set to continue.

Tesco and Sainsbury’s chiefs aligned on consumer sentiment

Both Justin King and Philip Clarke say consumers have started to feel better about the future and the jobs market, and more optimistic in general, but that hasn’t translated to shopping habits.

Household budgets remain under pressure and, while the newspapers are not quite as full of doom and gloom as they have been, consumers are still minding their pennies.

King said that, while there are a lot of good economic indicators and an improvement in sentiment, this is simply “less bad” than it was, rather than a return to the historical highs of optimism.

He added that changes in shopping habits since the financial crisis are here to stay. Customers are switching stores, brands, buying own-label and doing top-up shopping a lot more to waste less.

And he doesn’t think these habits will change now.

He’s probably right. And the success of discounter Aldi shows that. While Aldi doesn’t provide a full shop, it has clearly carved out a niche that has proved a winner with consumers.

So, while the competition hots up between the big four, especially as Tesco starts to get the UK ship in order, it’s the likes of Aldi that they still need to keep an eye on.