The Competition Commission (CC) recently published its Emerging Thinking document detailing its progress since it began its second round of investigation into the retail grocery sector. The report brought together the evidence it has received to date and indicates the commission’s focus going forward before its final conclusions are heard in early summer.
While the issue of an abuse of power by the UK’s major multiple rumbles on, Emerging Thinking contains some positive elements from the convenience sector’s perspective, according to Association of Convenience Stores’ (ACS) public affairs and communications manager, Shane Brennan. Before the inquiry process began, the ACS put forward its concerns about the future of the grocery market because it believed supermarkets were dominating the sector and abusing that dominance in three ways: through buyer power; by dominating local markets; and by their entry into the convenience sector on the basis that they don’t directly compete with convenience stores.
Fundamentally, he says, the commission has recognised that supermarkets do actually compete with convenience stores and their actions can have a detrimental impact on the sector. Furthermore, it is now focusing its attention on how competition works in local areas, observing how supermarkets work with competitors, whether there is evidence of predatory pricing tactics and investigating whether consumers are getting a bad deal. “We see that as positive, it shows they’ve engaged with what we’ve been saying about local markets,” Brennan says.
However, Emerging Thinking also contained some “enormous gaps”, from the ACS’s perspective. In a bid to highlight these, it has delivered a new submission compiled with colleagues from the Federation of Wholesale Distributors, the Scottish Grocers’ Federation, and the Northern Ireland Independent Retail Trade Association, urging the investigation to “delve deeper”.
Its submission centres around two key issues. One is the lack of recognition of a national wholesale market, which comprises independent third-party wholesalers as well as the major multiples’ buying and distribution functions. “[We said] there is a national marketplace and that’s a national market place for buying,” Brennan says. “That’s important because if they don’t acknowledge the market exists they can’t look in detail at the competition problems in that marketplace.”
Secondly, it is arguing that research surrounding the price differentials that it thinks lie at the heart of the imbalance of power in the grocery market is significantly lacking. “The area where we are concerned is the area around buying,” explains Brennan. “The CC’s Emerging Thinking points towards saying there are not significant problems with how supermarkets buy from and deal with their suppliers. They’re essentially saying they’ve not got enough evidence that there’s a problem there. Our view is that they’ve not been looking properly.”
According to Brennan, the commission’s approach of a telephone survey whereby 15 suppliers were questioned was not exhaustive enough. “We would say there are problems there and they need to be investigated,” he says. “The telephone survey is not the right kind of survey to get to the heart of the problem…They put out a questionnaire and they got 15 responses, which didn’t give strong indications of problems. We believe that 15 is nowhere near enough. We don’t know who they are, and ultimately the CC should be asking more detailed questions and going out there and telling the suppliers to give them the answers to the questions that need answering to give them a picture of what’s happening in the marketplace.”
The ACS argues that significant additional data gathering is needed to establish the cause and effect of buying price differentials. “Anyone who operates in this marketplace, from our perspective, knows that supermarkets get a cheaper price across the piece. We can’t prove that because we don’t know what supermarkets buy as we don’t have access to that information, but we know that because of the price they get on the shelf. A lot of independent retailers can’t buy a product from the cash and carry as cheaply as they can off the shelf at Tesco,” Brennan says. He suggests that the CC is intuitively wrong to come to the conclusion that no problem exists, as in 2000, when the CC conducted its inquiry for the first time, it found that the supermarkets got on average 11 per cent better terms than independent competitors. “So if you take what it is saying literally, since 2000 supermarkets are getting worse deals or [the convenience sector is] getting significantly better deals. We know that’s not right. There’s no way that they’ve got stronger and more dominant and are getting worse deals. The CC has got to go back and look at that more and that’s what our submission is stressing to them.”
However, in spite of the alleged discrepancies, the ACS is bullish this investigation will confirm some of its views on competition and the unfair practices of the major multiples, according to Brennan. “The CC is not necessarily going in the wrong direction. Emerging Thinking is ultimately inconclusive. The CC has never presented it as a definitive view of where it is going, [it] put it out there for responses and discussion to help [it] crystallise its thinking,” he says. “Overall, we’re pretty confident that we will get a good outcome from this inquiry. It’s important that retailers don’t think that this will be a whitewash at this stage; we still have confidence that we’ve made a strong submission and have submitted strong evidence and we will continue doing that up until June when they make their first round of conclusions.”
With the big four controlling more than 75 per cent of the grocery market, multiples clearly enjoy a stronghold. However, their foray into the convenience sector, which came about some four years ago, has arguably had a positive impact from a fresh produce perspective. Almost certainly they have raised the bar in terms of range and freshness, according to Alistair Phillipson at Capespan. “Clearly the arrival of the multiples represents significant competition for the independents,” he says. “I think overall the effect is to accelerate change within the sector to exploit the opportunities presented by changing consumer demand and lifestyles.”
Mike Greene, ACS chairman and ceo of research consultancy Harris International Marketing (HIM), agrees: “The introduction of supermarkets to the sector has raised everyone’s game…Everyone has had to improve to face that competition. But also, because supermarkets have entered, the supply chain has improved to the sector, so there are now better and more choices of supplier for fresh and chilled to [the] convenience [sector] and it’s enabled them to do better.”
Fresh produce is clearly a huge growth area in the convenience sector, and experts suggest that this is a trend likely to continue. “The role of fresh produce in the convenience sector is currently underdeveloped, but it will become increasingly important,” Phillipson says. “A significant segment of UK consumers are actively seeking healthier options in all areas of their lives, whether this is in the weekly shop, top-up shopping or on-the-go snacking. Fresh fruits and vegetables have a key role to play in meeting this demand. And, in my opinion, the convenience sector, whilst recognising this trend, has yet to fully address and exploit the opportunity.
Health is unanimously put forward as a key driver for the category in convenience stores. “Customers are increasingly aware of the impact of what they eat on their health and they are shifting towards healthier options and fresh produce is a key part of [that],” Brennan says. “The large supermarkets have shown in the way they operate their understanding of this growth in fresh produce, the 5 A DAY initiative and their own 5 A DAY promotions that they run, and those trends equally apply to local shops. Local shops can do more with it really.”
Florette’s Mark Newton agrees: “The government’s 5 A DAY [initiative] is starting to influence convenience store shoppers…consumer interest in diet and healthy eating will continue to help develop the role of fresh in convenience stores,” he says.
A general shift back to cooking meals, and an increase in grab-and-go lunchtime shoppers are other factors having a positive effect on the amount of people purchasing fresh produce from convenience stores. This trend is seeing a growth in demand for prepared fresh produce choices. “In an area previously dominated by pasta and mayonnaise-based salads, products such as the You Are What You Eat collection, under the Soleco label, are offering consumers more choice, with inspirational salads, interesting leaf mixes and exciting extras,” says Newton.
In addition, as consumers become less dependent on one weekly shop, the culture of top-up shopping is adding to the footfall in convenience stores. “It’s about getting it fresh for that day or the following day and convenience stores can fit into that very well if they are in the right place or area. And we certainly aim to help them understand it and do it better,” Brennan says. “I think that all the evidence and trends for the national marketplace show that fresh is a real growth and opportunity area for the independent retail trade and a lot of retailers are aware and are investing in it.
“There’s a critical issue around brand, and how you can make sure that the brand the retailer operates under is one that consumers trust to do fresh produce well, and that’s about education and investment in stocking the produce, and being prepared to see it not to perform well for a period of time in terms of sales so as to make customers familiar with the offer. Over time, the customer will come to seek out that type of offer from the shop. It’s about having an abundance of well-displayed, available fresh produce in your shop, but for the first few weeks you’ll throw a lot of it away.”
However, there is no one solution for the convenience sector, he says. For example, location is critical, as there are some areas where convenience stores operate that are simply not appropriate for strong fresh offers. Also, some stores are general grocers that people use for a range of top-up shopping, and some are more newsagent-based.
Moreover, Brennan says that the amount of risk retailers take on in delivering a fresh produce offer should not be underestimated. “[It’s risky] because of the investment in waste, and the investment in educating the customer that their local shop is a destination shop for fresh produce. If you go back 50 years, it was the natural place to shop for fresh produce. Over a time, the growth of convenience store changed direction and the customers started to see the local shop not as somewhere to get fresh produce, and we are slowly clawing that back.”
But with the right commitment, a fresh offer can be extremely lucrative, says Greene: “When it’s got right by a chain like Budgens its 25-29 per cent of shoppers buying it, so it really is a case of following the movie Field of Dreams [mantra] ‘build it and they’ll come’. You can’t just play with it and put a few carrots and onions out, but when you do it properly it can transform a store’s economics. You’ve got to change their mentality from seeing it as wastage to seeing it as capital investment…you can also get into what we call creative wastage, ie something can easily be used in tomorrow’s sandwiches made in store, but it may not have enough life left in it for the consumer to store it longer.”
Greene warns that if the convenience sector is too slow to realise the potential of upping its fresh offer and making it more sophisticated, they could easily lose out to a growing range of competitors. “I see an increasing number of stores like Fresh & Wild, Planet Organic and independent health stores popping up which are making fruit and veg at the very heart of what they do,” he says. “It’s no longer just about fresh; you need to look at whether you need to start stocking organic as well and local food, as food miles become more important. If convenience stores don’t do it, there are other formats that will.”
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