Grocers are responding to changes in the entertainment market by investing in digital platforms and developing their own services.

Tesco and Sainsbury’s have been swift to buy digital entertainment platforms and launch their own services to compete with Amazon and Apple

You don’t have to look far to find one of the grocers’ biggest priorities at the moment. The development of their digital offers might have started in the 1990s as their own websites germinated, but 20 years later the digital realm has become more integral to retail than many thought it ever world.

As Philip Clarke said at the World Retail Congress in Singapore last month: “Digital is now intrinsic to retail. Tesco has to be more than a retail company. We have to become a technology company too.”

And it is not just about infrastructure. Digital technology is no longer simply a route to market for existing products, supermarkets are also starting to sell digital products themselves.

Whether it is ebooks, music downloads or online video streaming, the entertainment category has been one of the most affected by the internet-led structural changes of the past few years. And with Waterstones the only specialist entertainment retailer left providing national store coverage, there would appear to be market share up for grabs.

The grocers are well placed to plug the gap left by specialists. They have a history of trading in the category in their physical stores and, crucially, they have the funds available to invest in new platforms and services.

Tesco’s digital efforts

Tesco’s streaming TV offer is targeted at families and ads are generated by Clubcard data

Tesco’s streaming TV offer is targeted at families and ads are generated by Clubcard data

Tesco Digital Entertainment chief executive Michael Comish says: “The way our customers choose to enjoy entertainment is changing because of new technologies. We want to be in the vanguard of this transformation.”
Shore Capital analyst Clive Black adds: “The home entertainment market is fundamentally changing, and the thinking is evolving in terms of how the grocers remain in that category.”

Tesco’s efforts have been extensive over the past couple of years. It has acquired a number of services, including digital books platform Mobcast in September 2012. It also purchased video streaming service Blinkbox in April 2011 and digital music platform WE7 in June 2012.

The grocer has also been building its digital team, poaching Facebook’s head of retail Gavin Sathianathan to head its digital books service, and Sainsbury’s head of digital and cross channel Mark Bennett to lead its music service.

Last month, the grocer launched Clubcard TV, a free streaming service providing family films and shows for the retailer’s 16 million Clubcard holders. The service pays for itself through advertising, and Clubcard data is used to generate ads targeted at particular shoppers.

“This service positions them in a unique area,” says Kantar senior analyst Stephen Mader. “I’m not sure how it will be fleshed out.” Sainsbury’s has also made moves into the digital space, launching the Sainsbury’s Entertainment website in November 2010 and gradually adding to its stable since. The grocer bought digital entertainment platform Global Media Vault in 2011, and followed that with the launch of a music download service in May 2012.

The acquisition of online books platform Anobii came shortly after that in June 2012, and in August last year the grocer revealed plans to launch a digital video service using the platform provided by Rovi Corporation.

Sainsbury’s group development director Luke Jensen said at the time: “On-demand streaming video is an exciting addition to our existing online offerings, and supports our customers as they progress from consuming
content on physical disc to accessing entertainment on a range of devices.”

The right platform

Asda has been quieter on the digital acquisitions front, but owner Walmart is one to watch in the tech space. Only last week the retail giant signalled its ambition to become a much more powerful force in digital commerce.

In 2010 Walmart purchased digital entertainment platform Voodoo and has ploughed effort and investment into making this a success.

There are no doubt a few bureaucratic issues to overcome first, but there is every chance it will bring the platform to the UK eventually. “Voodoo is the best example of a platform owned by a retailer that isn’t Amazon or Apple,” says Mader. “It is available in Mexico so it has already gone outside the US. I can’t see any reason for it not coming to the UK, other than the time it takes to get agreements in place.”

Morrisons and Waitrose, meanwhile, have not yet entered the space - the former has a few problems to contend with first, and the latter still has growth opportunities available elsewhere.

Mader says the grocers’ move into digital makes sense, but there are caveats: “If you can do it in a tailored, specific and interesting way that meets shoppers’ needs it’s a good idea. Just having a digital offer for the sake of it means you could miss shopper expectations and shoot yourself in the foot. Rolling out a mediocre product is not the way to win loyalty.”

He says Blinkbox is an interesting offer, because it doesn’t attempt to compete directly with Apple’s established platform iTunes. “It’s a way of driving value for existing shoppers. It won’t end up having £1bn turnover, but it’s a very good marketing platform.”

Comish maintains the decision to move into digital entertainment is a no-brainer - last year in the UK, sales of physical books, movies and music fell by 25% while electronic versions rose by 150%. He says: “We have long been one of the UK’s leading retailers for film, music and books. How customers choose to buy and enjoy those products is changing as technology develops and we want Tesco customers to be able to find these digital products with us.”

Playing catch up

Even though entertainment chains are now thin on the ground, that doesn’t mean entering the market will be easy. Apple and Amazon seem in many ways to have the market sewn up between them - the extraordinary pace of innovation they have set over the past decade means they’re not just ahead in the entertainment stakes, they practically invented the environment retailers are operating in.

“Amazon is demonstrably the market leader in terms of books and CDs,” says Black. “And Apple is the leader in downloads. Is there space in the market though? Absolutely.”

Comish agrees. He says Tesco can bring something to the market that Apple and Amazon have not so far, especially as it develops its multichannel offer. “The market for online entertainment is large and the key players - Tesco, Amazon and Apple - all have unique strengths. At Tesco, we have over 2,000 stores to leverage, we deliver in hourly slots rather than by day and we offer points for purchases.”

He continues: “We also have a host of other products we can bundle our entertainment with - examples include getting a digital copy when you a buy a physical DVD, bundling a movie with a meal and so on.”

The multichannel potential of downloads is not something Apple has exploited, and neither is it something pure-play Amazon can get its teeth into in the same way a store retailer can.

Mader says some of the best opportunities to compete with the digital big boys lie in creating a store environment that will draw shoppers in.

He points out that US bookseller Barnes & Noble’s Nook ereader is probably the most serious contender in the fight against the dominance of Amazon’s Kindle.

But Mader says creating an offer that entices shoppers away from the Kindle’s convenience is not easy.

“There needs to be some reason, some differentiator between what you are offering as a supermarket compared with Amazon and Apple,” he says. “Otherwise you won’t gain any traction with shoppers. I worry supermarkets won’t be aggressive enough in differentiating themselves.”

Black, meanwhile, points out that no market leader can be complacent. Apple and Amazon have done a stellar job of innovating over the past decade, but it is perfectly possible for them to become unseated by fast-thinking young upstarts.

“I don’t think Apple and Amazon should be complacent,” he says. “It’s a great time to be an entrepreneur in retail.

There are always focused, nimble and agile companies who will challenge them.”

But there’s a word of caution for grocers planning their own digital platforms - Tesco will launch platforms for both music and books in the coming months. Mader says the projects require high levels of upkeep, and need to be cutting-edge to compete. “It’s a lot of effort once it’s up and running. Expectations are high and you can get away with not being as good to a certain degree if you give content away for free. But if customers are paying for it that sets the bar where everyone else is,” he says.

Room at the table

But as long as the grocers remain focused, there’s no reason why there shouldn’t be a place at the table for them. It helps that the other big development to come is a renewed focus on the television as the core device.

At the moment, services have a resolute cross-device focus and iPads, Kindles, smartphones and Android devices form the collection of any self-respecting technology fan. But as the medium develops further, Black predicts televisions will come to the fore.

“Televisions are going to be the prime mechanism to enjoy movies, games and music,” he says. “Mobile phones and tablets are a different market.” As this capability develops and as services for internet-connected televisions proliferate, the grocers will need to make sure they are ready to move with the market and come up with an idea or two of their own.

Comish agrees this will be a priority. He says: “Apple works well on its own devices but does not reach many others, especially those in your living room. You won’t find iTunes on the Xbox 360, PS3, or any internet-connected TVs or internet-connected Blu-ray players.”

According to Clarke, Tesco will invest $750m (£496.2m) in technology this year, up threefold in three years, and as shoppers continue to take to digital content in droves this focus will remain.

The grocers have proved themselves adept at moving aggressively into new categories in the past, and this one is likely to be no different. It might be hard work - there are fewer people with in-depth digital skills available - and truly innovative thinking is required, but if there is a gap in the market to be commandeered, you can be fairly sure the grocers will find it.

The grocers and digital entertainment

Sainsbury’s purchased ebook platform Anobii

Sainsbury’s purchased ebook platform Anobii

February 2010 Walmart acquires online movie service Voodoo. Analysts say it is possible the grocer will bring the service to the UK

2010 Sainsbury’s creates the Sainsbury’s Entertainment website

April 2011 Tesco takes a majority stake in video-on-demand site Blinkbox

October 2011 Sainsbury’s buys digital entertainment platform Global Media Vault

May 2012 Sainsbury’s launches a music download service

June 2012 Sainsbury’s acquires online books platform Anobii

June 2012 Tesco buys digital music platform WE7

August 2012 Sainsbury’s announces plans to launch a digital video service

September 2012 Tesco acquires digital book platform Mobcast

February 2013 Tesco unveils Clubcard TV, an online streaming service for Clubcard holders. The service is free and features targeted advertising based on Clubcard data

To come Tesco will launch Blinkboxmusic and Blinkboxbooks, built on their respective platforms, in the coming months