Grocers must walk a tightrope of managing their own inflationary pressures to preserve margins while continuing to win customers, says Alvarez & Marsal’s Erin Brookes

As the country battles a cost-of-living crisis and food inflation continues to rise, the UK grocery sector finds itself in the middle of another turbulent trading period.

Supermarkets are being squeezed by the soaring cost of supplies and increases in their energy, transport and staff expenses.

Grocery inflation surged to a record 16.7% in January, the highest since 2008, driven by price rises in essential products such as milk and eggs. Brand manufacturers’ price hikes are adding to pressure, alongside food shortages caused by supply snarls.

Consumer sentiment continues to worsen as households face escalating bills amid a worsening economic outlook. According to the latest GfK Consumer Confidence Barometer, consumers have not been this gloomy since at least 1974. Many are cutting their spending and trading down in both products and stores as a result.

In this environment, grocers must walk a tightrope of managing their own inflationary pressures to preserve margins, while continuing to win customers in this highly competitive environment.

Price increases at the shelf edge are an unfortunate necessity right now. Cash-strapped shoppers have then been trading down across ranges, switching to another grocer or simply deciding to buy less.

UK supermarkets are already experiencing a decline in volume sales, which were down by around 7% in the four weeks ending January 28, according to NielsenIQ.

In this context, discounters are winning share from the big players at an unprecedented pace, with Aldi overtaking Morrisons from the UK top-four league last September.

Keeping staff in the right place, at the right time

But how to recover cost inflation while continuing to offer value to customers? One response lies in finding new ways to cut costs and improve efficiency. The focus should be on creating savings that will allow grocers to keep prices low enough to hold on to their customers.

This means looking at every aspect of the business and taking steps, big and small, to streamline operations according to the economic climate. For example, with payroll costs in the spotlight, leaders should be asking whether store staff are in the right place at the right time.

Similarly, they must question whether there are locations that are no longer profitable given the change in shopping behaviour accelerated by the pandemic, or sections of space across the estate that are not productive.

“The focus should be on creating savings that will allow grocers to keep prices low enough to hold on to their customers”

Take Tesco. The company, which is predicting a decline in profits this year, is shutting fresh-food counters as part of a cost-cutting drive. It is also closing pharmacies and moving overnight roles to daytime in several stores. Rivals Asda and Sainsbury’s are also scaling back in-store services to concentrate staff on more profitable shopfloor tasks.

While the measures have an obvious element of cost saving, a lack of interest from shoppers and changing habits triggered by Covid were also key drivers of the change.

Data from retail insight specialist IGD showed that only 6% of shoppers used an in-store counter in the last quarter of 2021. That said, any decision to reduce services needs to be data-driven and led by customer insight to avoid alienating loyal shoppers.

Looking beyond the low-hanging fruits

But grocers also need to explore measures that will help them achieve longer-term improvements and emerge stronger from this challenging period.

Investing in self-service and digitalisation is one of them. Some tactics being currently deployed in store include expanding from the now ubiquitous self-service checkouts into self-scanning systems – Sainsbury’s SmartShop is one example.

Asda is trialling automated facial recognition at self-checkouts to estimate a buyer’s age when buying alcohol, removing the need for human intervention. These efforts free employees’ time to focus on higher-value tasks. Ultimately, they will also result in an overall better experience for customers.

Technology should also be leveraged to optimise logistics and distribution networks. While many omnichannel players have started to automate warehouses before the current crisis, rising wages and supply chain strains are forcing them to take a step further.

Automated cranes that reduce picking time and software that helps monitor stock levels in real time and manage replenishment are just some of the possibilities.

On top of efficiency gains that can help alleviate short-term cost pressures, such automation will help businesses build supply chain resilience to navigate a world of constant disruption.

M&S’ acquisition of its food logistics partner Gist last year illustrates how strategic that issue has become. The acquisition is expected to generate immediate benefits by eliminating contractual costs and fees while aligning the execution of operational processes.

Optimising energy spending to cope with soaring bills

Energy-spending optimisation has also become front and centre. Wholesale gas prices are around three times their level before the start of the pandemic, and this is about to get worse in April as a weaker government support package is introduced.

To some extent, soaring gas and electricity bills added urgency to power-saving initiatives that were already being sought as part of ESG agendas. Some are mundane, such as temporarily dimming lights and lowering the temperature in stores and distribution centres. Others are more strategic, like Waitrose’s decision to speed up the rollout of electric heat pumps in all of its supermarkets.

Iceland, on the other hand, is reportedly set to close five branches, after warning last year about “unsustainable” energy costs. The retailer’s dependency on fridges and freezers has seen energy bills climb to £70m in 2021, or 2% of its annual sales, a figure that was expected to double last year.

Store portfolio plans should be revisited in light not only of escalating energy costs but of other, often more complex variables. With buying habits settling after Covid, many grocers are realising their retail footprint must move with the times.

“With buying habits settling after Covid, many grocers are realising their retail footprint must move with the times”

When thinking about the future of their store estate, they must embrace trends such as the increase in people working from home and the desire to shop local.

M&S’ radical overhaul of its shops is one case in point: it aims to reduce the number of full-line stores while prioritising larger stores that allow people to browse, with the bonus of a cafe and free parking.

Many of these dynamics continue to change and evolve, and therefore supermarkets must tread carefully when implementing cost-cutting measures.

Balancing short and long-term improvements is critical, especially if significant investment is required to achieve a change programme or if there is a risk to customer experience.

Retail leaders should also strive to ensure that cost savings translate into cash savings by focusing on working capital management, robust governance over spend and Capex as well as an iron grip on pricing.