Retail

The UK Grocery Market

Grocery is the largest of all retail segments and in the UK is forecast to grow by 15% over the next five years from £185 billion to £213 billion (IGD).

Alongside this substantial growth, the UK grocery market is going through a period of adaptation as the UK Government negotiates Brexit. This has accelerated the need for grocery retailers to look to ways to maximise efficiency and reduce costs within their operations to sustain profitability and further invest in their customer proposition.

Price and Cost Dynamics

After several years of ongoing price deflation within the grocery market we have seen the return of inflation, driven by retailers adjusting pricing following the fall in the value of sterling after the EU referendum.

Opposing this, the market is experiencing labour cost inflation driven by a rise in the national living wage combined with a tightening of the labour market as some EU residents return to their home countries in the wake of sterling's decline. This will impact retailers across the UK and is likely to put pressure on margins.

The Shape of UK Grocery

The grocery landscape is changing rapidly, most significantly through the online channel. IGD forecast that over the next five years the online share of the market will rival hypermarkets at close to £16 billion. Its growth is being fuelled both by innovation from existing players and by new market entrants. This distinctive shift in consumer spend makes it essential for retailers to rethink their format structures and priorities.

Alongside online, IGD predicts continued significant growth from the hard discount sector which attracts and retains customers through deep discounts on a limited range of products. This places intense pressure on margins as established national chains adjust their pricing propositions in an attempt to differentiate and compete. In addition, some food retailers have attempted to sustain profitability in growth by investing in, or merging with, companies in other retail segments.

Across the industry we are seeing shoppers lead increasingly digitally dependent lives. It therefore becomes more vital to harness technology to improve the customer experience in a competitive market both online and in stores. We are seeing an increase in innovation, ranging from electronic in-store pricing to voice activated grocery ordering, to support this trend and it is becoming an important differentiator in managing costs and enhancing loyalty across the industry.

Impact on Retailers

Given the low margins in the industry, retailers need to be cost efficient and behave rationally when deciding strategic priorities on price, proposition and channel offering.

Regarding online, we have started to see changes as retailers re-examine their online propositions and focus on profit and sustainability over short-term growth.

The size of the grocery market results in significant opportunities for retailers and throughout the industry we are seeing a continued focus on the customer proposition through differentiated formats, technology and service levels.

What This Means for Ocado

We continue to grow in excess of the UK grocery market enabling operating leverage and stronger margins to reinvest into our proposition and remain an innovator within the market. Being a pure-play online retailer we are well placed to take advantage of the ongoing channel shift. As other retailers step back to readdress their offer, we continue to build capacity and capture market share. Our growth enables us to further invest in our industry-leading technology and IP to ensure we maintain our competitive edge.

UK Grocery Market Size

Grocery market graph

Market value (£bn)

Source: IGD

UK GROCERY 2017 TOTAL SALES GROWTH

Grocery total sales

Source: IGD, Company data

The UK Grocery Market in 2017

UK Grocery 2017 Total Sales Growth

Source: IGD

Growth in the UK Grocery Market between 2017 and 2022

UK Grocery 2017 2022 Total Sales Growth

Source: IGD

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Solutions

The Global Grocery Market

By 2021 IGD estimates that the global grocery retail market will expand by $2.4 trillion driven by growth in population and wealth, providing sustainable and attractive opportunities for retailers. In some regions, most notably Asia and the Middle East, we are seeing this growth also driven by significant inflation. Europe and North America combined will account for 38% of the share of total grocery sales by 2021, highlighting the continued importance of these regions globally.

The Changing Shape of Global Grocery

Outside of a few regions, online grocery is still too small to be disruptive. However, as we see the continued adoption of technology on a global scale, as well as new competitors entering the market, we are seeing e-commerce strategies shift up retailerʼs agendas.

Online penetration in grocery has lagged other retail segments due to the complexities of fulfilling food online given the number of products that typically make up an order and the variety of temperatures they require to keep fresh. Globally, we see online grocery penetration most pronounced in regions where overall online shopping is highest such as South Korea and Japan, indicating the direction of travel for other regions as we enter an increasingly digitalised era.

During the year we saw significant moves by Amazon to grow its presence in grocery retailing, including the launch and rollout of Amazon Fresh into new regions, development of their Amazon Pantry and Prime Now offerings, and, most importantly, the acquisition of Whole Foods Market with 471 supermarkets in the US and UK. This significant industry development highlighted the company’s strategic priorities and provided the retailer with vital grocery credentials to complement and accelerate its ambitions in online grocery. The global reach and technical prowess of Amazon has caused retailers globally to re-examine the strategic importance of their own e-commerce propositions.

Impact on Retailers

As the online channel continues to grow this presents both a huge opportunity and a significant challenge for grocery retailers who must now determine which channels to invest in to best retain their customers and continue to grow profitably in an increasingly competitive market.

The Market for Online Grocery Solutions

There are several options for retailers looking to invest in their online proposition, and the route retailers choose will depend on their perception of potential market size, internal capabilities and strategic positioning.

Some retailers have chosen to develop their capabilities in-house through a variety of options including store picking capabilities, click and collect sites, and the construction of dark stores. This has been done either by purchasing or developing a variety of software solutions including front-end interfaces, supply chain forecasting, warehouse management software and routing algorithms.

Others have chosen to use one of the increasing number of e-commerce solutions providers, hosting a variety of services to enable retailers' online propositions.

Popular solutions include Instacart and Shipt which provide a full solution to the retailer by using crowdsourced labour to pick and deliver the retailer’s products to the customer, although sometimes retaining the customer data. The challenge with most of these solutions is that they result in high processing costs per order and face service challenges such as poor product availability.

Retailers looking to service a more significant online market may migrate from a store picking solution to larger, centralised sites, most commonly known in the industry as dark stores. Dark stores are not open to the public and range from being purely manual facilities to utilising physical equipment provided by third party logistics firms in other retail segments.

The complexity of online grocery makes profitable online fulfilment challenging, and the development of sustainable solutions is essential to ensure continued long-term growth for retailers.

What this means for Ocado

Our Solutions team aims to leverage our industryleading capabilities within online grocery to capitalise on opportunities arising from the ongoing channel shift across the world.

Through our years of experience within grocery e-commerce we have developed modular, scalable and customisable solutions to meet retailerʼs e-commerce needs. Utilising our flagship product, the Ocado Smart Platform, we believe we can help grocery retailers globally launch and develop industry leading online propositions to their customers, further accelerating channel shift.

Online Grocery Penetration

Online Grocery Penetration

Source: Citi Research, Korea Statistics Office, Kantar

Economic indicators point towards growth

Regional Gdp

Source: IGD Research, IMF

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