Food retail has been transformed in the last 20 years. Rebecca Thomson looks at how the sector has changed and its prospects.

If there’s one retail sector that has had a successful 20 years, it’s grocery. The last two decades in food retailing have produced many of retail’s most important ideas and biggest news – from loyalty cards and mobile apps to Walmart’s acquisition of Asda.

It helps, of course, that the grocers operate in an obligatory spend market – people will always need food. But while grocery’s essential role in people’s lives has enabled a phenomenal level of growth at retailers such as Tesco, the fierce level of competition means innovation is crucial and constant structural change makes resting on your laurels dangerous.

The challenges supermarkets face seem to get more and more complicated. As Tesco group chief executive Philip Clarke said at the World Retail Congress (WRC) earlier this month: “The changes we face today are broad and complex. How do you win in a digital world, at a time of great upheaval?” The grocery market of 20 years ago looked entirely different to today. It was more fragmented – with now disappeared players such as Somerfield and Safeway still going strong – before market consolidation led to the current position of four big groups owning about 80% of the market.

It was also more homogenous. Grocers opened supermarkets sized between 10,000 sq ft and 50,000 sq ft, a range that has since expanded to include everything from 3,000 sq ft convenience stores to 100,000 sq ft hypermarkets. “We now run a much bigger spectrum of stores,” says Sainsbury’s retail director Helen Buck. “That requires different skills.”

The growth of non-food categories drove much of the change in store sizes, with Asda kicking off the trend by launching its George clothing line in 1990. Since then, the grocers have grabbed market share in clothing, electrical goods and general merchandise, necessitating bigger and bigger stores – their appetite has appeared insatiable at times and, despite a wobble in non-food growth during the downturn, their strength shows no sign of abating long term.

Shore Capital analyst Clive Black says: “There won’t be a return to the credit-fuelled binge as seen pre- Northern Rock. But as the grocers develop their capability within categories you can expect them to gain share in non-food.”

Online integration

Ocado is focusing on pricing as well as customer service

Ocado is focusing on pricing as well as customer service

Of course, stores are no longer the only thing to worry about. Ocado chief executive Tim Steiner is one ecommerce entrepreneur who moved quickly to take advantage of a step-change in technology, and the market has been moving online at a steady pace for the past few years. “The internet has massively democratised where customers can choose to shop,” he says. “We’ll see a dramatic change as consumers decide where to buy their groceries based on service. Lots of consumers shop at Tesco because it’s the nearest. Once the market moves more online this will change.”

But while online sales have become crucial for the supermarkets, the extent to which the grocery market will move online is still under debate. While online is undoubtedly growing, the lion’s share of grocery shopping is still done in store. Buck says: “How big it will become I’m not sure. I don’t think we’ll see all shopping going online.”

Steiner thinks the longer term answer is down to how good retailers’ web services are. He says: “It will depend on the strength of the proposition offered to customers. We are striving to offer better pricing, ranges, service and personalisation than you can get in store, and when that happens you will see a significant channel shift.”

Space race

Online has also contributed to a halt in the race for space. Throughout the 1990s the grocers laid claim to as much space as possible, opening more and more stores – in 1997 Tesco had 568 UK stores, today it has almost 3,000.

As Steiner says: “The successful retailer of the past 20 years was the one with the most efficiently run property operations.”

But as growth in non-food slowed and customers’ shopping habits changed, space is not the priority it once was. Clarke said at WRC: “We’ve called time on the old ‘space race’. Retail will not be about buying large swathes of new real estate.”

Instead, the priorities have become technology-related – and perhaps one of the first is the importance of being seen to be digital. Multichannel and mobile projects are still in their relative infancy for most retailers, but many are keen to be seen to innovate, and all are fearful of being left behind. As Clarke said: “Digital does not just offer smart new ways to shop. It gives us the opportunity for a warmer, more meaningful conversation with our customers.”

Tesco has launched initiatives such as a drive-through collection point to aid convenience

Tesco has launched initiatives such as a drive-through collection point to aid convenience

Black predicts click-and-collect services will be big news for the grocery sector, as customers warm to the convenience of ordering online and collecting on the way home from work. Tesco has now opened 1,000 click-and-collect points across the UK, including its first drive-through collection point.

Black says: “The grocers have very effective fulfilment in click-and- collect, and that could differentiate them. Online shopping has limitations in fulfilment because customers have to sit at home, but click-and-collect has potential.”

It’s not just consumer-facing technology that is important, either. Buck says continuing improvements in IT will make it easier for retailers to get inventory levels just right. “Technology helps us to be more efficient in managing stock, and getting the right stock into the right stores at the right time. Still more will happen on that,” she maintains. Technology is changing the way people shop, and so is the recession. Buck says the effects of the downturn will be permanent – shoppers now visit supermarkets more frequently in an effort to minimise waste, for instance, and buy smaller amounts each time, instead of visiting at the weekend for one large, expensive weekly shop.

Coupon customers

Consumers have also become more demanding. Buck says: “The recession has shifted things, there’s no question. People are becoming a bit savvier. They’re buying more promotions and shopping more frequently, and I don’t think people are going to stop that.”

Promotions have always been important in grocery retailing, but their prominence has rocketed in the last few years since food inflation started to kick in. Black says: “In 2006 prices started going up, and they will continue to rise. Food as a proportion of household expenditure declined for decades, and now it’s going up again.”

The inflationary pressures are coming from outside the UK’s control – this summer’s US drought, for instance, and from uncertainties in other international food commodity markets. But it will continue to have a profound effect on trading as retailers fight to stand out via promotions.

In addition to the continuing importance of price, further layers of complexity are to come. Consumers have never been more aware of how much they’re spending, but being the cheapest and most convenient is not necessarily enough – nowadays, branding and marketing is as important to grocers as it is to image-conscious fashion retailers. There’s a reason Waitrose has thrived throughout the downturn – while its price-match policy was undoubtedly successful, it is often the chord its values and image strike with consumers that drives them to spend. And Morrisons has gone to great efforts to promote its food production credentials.

Waitrose’s service and values have struck a chord with shoppers

Waitrose’s service and values have struck a chord with shoppers

Buck says: “Trying to run a supermarket purely on low price may well become quite difficult. We think values are going to get more important. You can’t afford to allow prices to go out of line but that doesn’t differentiate you ultimately.” She notes that grocers will need to cultivate a clear stance on their values. “We believe it’s critical to be open and transparent with our customers on what we stand for,” she says.

Personal shopping

The brand has to strike the right note and differentiate a grocer, but marketing too must increasingly be personalised for each customer. Steiner points out that the average shopper buys from a range of 200 to 300 products, but Ocado’s range spans tens of thousands of products. The way to manage that, he says, is to use data to highlight the products each shopper is likely to want to see. He says: “We’ll see a massive increase in the quality of the usability of user interfaces and processing of customer data. Online, you can redesign your store layout for every individual customer. It’s going to be a growing part of what online has to offer over store-based retailing. Customers online will get a far more personalised service, that makes their shopping much easier.”

The pace of change will continue to be relentless, but in many ways the sector will continue trading as normal.

Black predicts the growth of discounters such as Aldi and Lidl will normalise, with their market share remaining at about 7% or 8%, while the Co-operative will hold its own in the convenience market.

Discounters such as Aldi and Lidl have been popular in the downturn

Discounters such as Aldi and Lidl have been popular in the downturn

Morrisons, meanwhile, will continue its march into the South and online. Mobile and multichannel will prompt steady evolution for the major players, and as long as no one decides to ignore these big changes, there are unlikely to be many major shake-ups in the market – especially as Tesco works to get back on a firm footing following recent difficulties.

This process of evolution will continue to change the way the UK’s biggest retailers do business. Buck says: “I’m sure in 20 years’ time, the supermarkets will look quite different.” But whether it’s mobile technology, inventory optimisation or international expansion, the grocers are likely still to be leading the pack in another 20 years.

20 years of change in grocery

1990 Asda launches the George clothing line

1995 Tesco overtakes Sainsbury’s to become the biggest retailer in the UK

1995 Tesco Clubcard is introduced

1997 The first Tesco Extra store is opened in Essex

1998 Morrisons opens its first store in the South of England

1999 Walmart buys Asda

2002 Ocado is founded

2004 Sainsbury’s launches its Tu clothing offer in 160 stores

2005 Tesco opens the first of its Home Plus stores

2010 Amazon launches its grocery category

2010 Tesco introduces its first mobile app, and in 2012 announces plans to consolidate all of its apps into one