Morrisons boss David Potts described the first half of the year as the “renaissance of the British supermarket”. Retail Week analyses whether the stats back up his assertion and what it means for the wider grocery market

  • Morrisons boss David Potts predicts a “renaissance of British supermarkets”
  • Morrisons in a strong position with partnerships with Amazon and Deliveroo and after innovation in lockdown
  • Big four investing in price and digital to up the ante in challenge to discounters 

At first glance, Potts’ comment may seem surprising, given that Morrisons’ interim pre-tax profits slumped 28.6% due to coronavirus-related costs and a 70% slide in its £3.5bn fuel business during lockdown. 

David Potts Morrisons

David Potts: ‘Supermarkets are firmly at the heart of the communities that we serve’

However, despite spiralling costs and a big consumer shift to online grocery spending, Potts clearly believes Morrisons’ – and other food retailers’ –  best period lies ahead. He was adamant Morrisons would make a profit in the second half of the year and declared the pandemic had effectively kickstarted a new period of prosperity for supermarket groups. 

He said: “I believe we’re witnessing the renaissance of British supermarkets. They are firmly at the heart of the communities that we serve. Our strategy has served us well, being ourselves and doing the right things when they matter most. We’ve grown faster and become more relevant.”

With so much of the retail industry in upheaval because of the coronavirus crisis and the catastrophic impact it has had on the economy, Potts’ assertion seems bold. 

But is he correct? And, if so, what might that mean for grocery retail?

Supermarkets sweep up

When pressed on what he meant exactly by a ”supermarket renaissance”, Potts pointed to the return of the traditional, big basket, once-a-week shop. 

“There’s been a shift to a much bigger basket that’s going on now, with lower numbers of transactions. This shows that customers aren’t shopping around in those medium-sized stores as much as they were. I do see that as a renaissance for supermarkets in terms of that bigger, once-a-week shopping basket.”

Kantar grocery spending data backs up Potts’ point on the growth of lower frequency, but higher value transactions. 

In April, customer trips to supermarkets fell to an average of 14 a month, compared to 17 “in more normal times”. However, that was offset by a £7 average increase in basket spend to £26.02. 

“At Morrisons, ecommerce is profitable. We’ve leveraged our existing assets to make it so”

David Potts, Morrisons

While that trend did decline over the summer, as restrictions began to lift on other retailers and on pubs, restaurants and bars, the continuing circulation of the virus has nevertheless led to stabilisation. 

In August, Kantar observed that while basket sizes had dipped slightly, at £25 on average per trip, it was still “a world away” from pre-coronavirus basket size average of £19. 

Kantar consumer insight director Fraser McKevitt says the summer “saw a very slow return to normality”, but he insists “we’re still very far away from where the market was”. 

Coronavirus social distancing queue

The big, once-a-week supermarket shop has returned

Shore Capital analyst Clive Black, Morrisons’ house broker, says ultimately whether or not the big, once-a-week shop is here to stay depends very much on factors such as the permanence of the trend of working from home

While footfall figures on suburban high streets have flourished during lockdown, city centres once populated with daily commuters have dropped precipitously, taking much of the food-to-go market and city centre convenience offerings with it. 

Black says “at least 20% to 30% of people who were commuting daily on January 1, 2020, will not be doing so on January 1, 2021”, which will see those food-to-go and convenience food chains contract by the same amount. 

Because of the increase in basket sizes and the struggles of coffee and restaurant chains such as Pret a Manger and Pizza Express, Black believes big supermarkets will continue to enjoy an “elevated demand profile”. 

Digital shift

Potts said that another key driver of the supermarket renaissance was not just the surge in online delivery demand and capacity, but also how the pick-at-store model deployed by Morrisons, Tesco and Sainsbury’s made the enterprise more profitable. The established grocers are becoming just as big players online as they are in bricks and mortar.

“At Morrisons, [ecommerce] is profitable. We’ve leveraged our existing assets to make it so. We own 87% of our stores and we’ve been able to, through Ocado, develop a store-pick model and, along with our big distribution shed in Birmingham, increase capacity profitably,” he observed.

Potts noted that pre-coronavirus, ecommerce accounted for 7% of total grocery sales. “I’m very certain that since March it’s grown to be a lot bigger than that,” he said. “It may be that some comes off over the next 18 months or two years, but that scale of growth is set in now.”

Kantar market share data for August found that online stood at 13.5% of total sales growth for grocery, and would continue to grow. 

“The online channel is now no longer the nemesis of the supermarket’s P&L line”

Clive Black, Shore Capital

GlobalData grocery analyst Thomas Brereton believes the agility with which Morrisons has partnered with other brands and innovated has put it in a good position to capitalise. 

“They’ve been quick to make deals with the likes of Amazon and Deliveroo and they’ve also rolled out a number of new initiatives – food boxes, helplines, that sort of thing,” he says. “For Morrisons, all of these things may have led to a renaissance in how they see their image within the wider market with customers.”

Shore Capital’s Black agrees with Potts and argues that the store-pick model has finally solved the age-old issue of delivering groceries to homes profitably and sustainably.

“Critical to this is that the big four investment means that store-based picking is delivering the capacity increase in online,” he says. “As a result, the online channel is now no longer the nemesis of the supermarket’s P&L line.”

With the country in the grips of a recession and price remaining king as far as many shoppers are concerned, what does the growth of such trends mean for the discounters?

Discounters left behind? 

For Black, the rapid growth of online grocery sales puts value giants Aldi and Lidl, which typically trade in smaller stores with a smaller assortment, in a tough position. 

“It’s going to be a big problem for the discounters. Currently, they’re only playing in 83% of the market, compared to 91% or 92% when the year started,” he says. 

Black says the growth of online home delivery has been powered by “the elderly, the risk-averse and those shielding” who either will not or cannot go shopping in stores for the foreseeable future. 

LIDL_TOTTENHAM_COURT_ROAD_15

Lidl has launched an in-store loyalty app and opened new stores

Kantar figures support that view. In particular, Aldi saw its market share slip 0.3% in May, down to 7.7%, while its sales growth notably stalled. However, its sales have since bounced back and Aldi’s share of the market in August was back above 8%.

On top of that, competitors have upped the ante on price. Only this week, Morrisons unveiled £100m worth of investment on lowering prices on more than 400 products. 

Potts pledged that the retailer would continue to invest in price throughout the second half.

With the discounters all but shut out of the online market, and as Morrisons and the rest of the big four investing heavily in price, it seems another strand to Potts’ supermarket renaissance might be a weaker challenge from the discounters. 

“Price is only going to become more and more important to consumers and the discounters will always believe they can beat the big four at the tills”

Fraser McKevitt, Kantar

However, both discounters have made forays in the digital space. In April, Aldi launched its first-ever online food offer by moving into home delivery food boxes. Lidl last month rolled out its Lidl Plus rewards app for customers in-store. 

Even with all of the investment from the likes of Morrisons on price, both Aldi and Lidl will still comfortably have cheaper comparative baskets than the big four.

GlobalData’s Brereton believes in the end that price and perceived value will continue to stand the discounters in good stead through a recessionary period. 

“Because the discounters use the price as such big leverage in gaining customers, they don’t have to be quite as savvy when it comes to quality or having their store environments perfect,” he says. 

“They have the golden bullet of price and, ultimately, I think that will just strengthen their position in the market. They’ve spent so long building that connection in customers’ minds between themselves and price, that’s a really hard bond to break”.

Kantar’s McKevitt agrees. “Price is only going to become more and more important to consumers and the discounters will always believe they can beat the big four at the tills”. 

Investment opportunities? 

As supermarkets make more at the tills and through online, might the final strand of Potts’ renaissance theory be realised in greater valuations of grocers by investors?

An obvious candidate for that is Asda, given parent Walmart is in discussions about a potential sale. On the other hand, as Morrisons’ Amazon relationship deepens, might it offer the etail giant a relatively seamless way into the UK grocery market at scale?

Black believes growing sales and profits will make UK grocers more attractive acquisition targets. While costs have spiralled because of coronavirus, he says the supermarkets will be able to bring those down as time goes on. 

“In essence, supermarkets are becoming very capital-disciplined assets,” he says. “New space is running behind market growth, which is driving up cash flow per square foot. They’ve also got ecommerce working profitably. All of these things are suggesting there is a reappraisal of the future value of supermarkets going on.”

On balance, Potts’ assertion that supermarkets are entering a new golden age looks as if it is on the money – but the grocers will not be complacent. All will now be battling to ensure they are the main beneficiary of this new flourishing bloom.