Retail after the crunch

As economic slowdown continues in developed economies and elsewhere, a sector that has been particularly hit has been retailing.  However, even an impending recession is not necessarily bad news for the entire retail sector.  A key component of this sector is supermarkets, with giants such as UK firm Tesco and US giant WalMart enjoying considerable market power not only in food retailing, but also increasingly areas such as clothing and consumer electronics, and some of these larger stores can reap benefits from consumers’ changing habits.

Recession opportunities

Changing consumer behaviour means that different kinds of supermarkets experience the downturn in different ways:

• The big winners so far have been ‘no-frills’ discount retailers, particularly ALDI and Lidl, which operate throughout Europe and further afield.  For example, ALDI’s UK sales increased 44% year-on-year, and have increased 40% over the past quarter, helping the company increase its market share from 2.9-10%.  ALDI competes fiercely on price, while also running leaner operations than its larger counterparts.  It has recently sought to capture customers from high-end competitors by launching product lines targeted specifically at these groups.

• US warehouse-style retailers such as Costco, which offer similar no-frills services under an alternative model of annual fees and close-to-wholesale prices, have also benefited from consumers’ desire to tighten belts.  Costco sales rose 10% year-on-year in July, driving a 10% rise in the company’s share price – exceeding most analysts’ expectations.

• Supermarket giants have lost some market share at the lower end, but they continue to be able to leverage their market power. For example, WalMart’s share price has increased 25% since the start of this year, thanks to the company’s ability to compete on price, and offer a one-stop source of a wide range of relatively competitive products.  WalMart has also been able to capitalise for the time being on its worldwide operations, benefiting from different international economic conditions.

• While not booming, sales at high-end supermarkets have held up. For example, sales at high-end UK supermarket Waitrose rose 1.9% year-on-year in the last week of August, in the context of a 2.4% year-on-year drop in sales across its owner, John Lewis Partnership.  This is because many customers of such retailers remain relatively less price sensitive, even in the present economic climate, while others buy food at such stores as an alternative to eating out.

So who loses?

Nonetheless, the outlook is not so positive across supermarket retailing, and even current strong performers face a series of challenges as economic conditions worsen:

• Pain has correlated inversely with size. Smaller retailers have suffered most, and smaller supermarket chains have paid the price for their less impressive economies of scale. This has been particularly the case in the United States, where large national chains have a less dominant position than in much of Europe.

• Looking ahead, as customers have become more price-sensitive, fierce price wars have broken out to attract them – for example between Tesco and ASDA in the United Kingdom. Should these intensify and spread, such retailers face increasing commercial risks.

• The same factors are also likely to influence the product decisions consumers make.  Some relatively expensive food options, such as those branded as ‘healthy’, as well as organic will continue to decline, particularly in a context of continuing food price inflation.  This means that supermarket price wars increasingly may well focus less on these kinds of items, than their cheaper, often rather less healthy, alternatives.  For example, US natural foods supermarket Whole Foods Market recently announced that a 30% drop in third-quarter net income, to 33.9 million dollars.

As the credit crunch bites harder, such trends can only intensify, further shifting the balance of power among big shopping chains.