The impact of consolidation within the grocery sector: An analysis of perspectives 

The announcement of the proposed merger of Tesco and Booker in January 2017 sent a seismic shock wave through the grocery sector, setting the tone for activity throughout the rest of the year and into 2018.

In the 18 months since the announcement, a slew of mergers and strategic partnerships continue to shake up the sector. Coming in wake of CMA approval of the Booker merger, Tesco have also confirmed a buying alliance with French supermarket giant Carrefour. Sainsbury’s are looking to invest £10bn in acquiring Asda. The Co-Operative has bought NISA and signed supplier terms with Costcutter. Morrisons now supply the McColls estate, and have an established relationship with Amazon to deliver its goods through the Pantry and Prime services. Indeed there has been speculation that Amazon could even look to buy Morrison’s in an attempt to extend its market share.

Consolidation impacts the whole grocery ecosystem, from manufacturers, to suppliers all the way  to the consumer looking to buy a pint of milk. This article (part one of two parts) takes a look at the impact of consolidation, from 3 different perspectivesthe supermarkets, the discounters and the consumer.

1. The Supermarkets

The proposed merger of Sainsbury’s and Asda could see them take 30% of the grocery market share, marginally outstripping Tesco. Simply put, two businesses would control approximately 60% of the market. Astonishing. Retail Gazette reported that in the 12 weeks to April 22, Sainsbury’s and Asda have a market share stands at 15.9% and 15.5% respectively. The consolidated businesses would therefore have 31.4% of the market, taking them beyond Tesco’s current market share of 27.6%.

The most obvious question is; Why? There are a couple of primary reasons.

Amazon are making moves into UK grocery, both online direct to consumer through Amazon Fresh and the tie in with Morrison’s, and through the 2017 acquisition of Whole Foods. The threat is not insignificant. Amazon Fresh offers friction-light purchasing and leverages Amazon’s supply chain heft to offer immediacy in fulfilment. It’s a compelling proposition given ever increasing consumer focus on ‘the final mile’.

The Whole Foods stores, whilst there are currently only 7 in the UK (all London based), offer opportunity for introduction of digital customer experiences in physical settings. The convergence of the digital and physical worlds continues apace, and Amazon are clearly well positioned to innovate in this space.

In recent years the most obvious threat to market share of the ‘Big Four’ has been the continued rise of the discounters. In 2011 Aldi and Lidl held a combined market share of 5%. At the end of quarter one 2018 the combined share is 12.6%, an increase of 152%.

The rise of the discounters has been propelled by two primary factors. Low prices and improvements in public sentiment. In economically challenging times value is more important than ever, and in the years following the financial crash, the discounters capitalised on the opportunity this presented.  Offering substantially lower prices for comparable products became key to gaining competitive advantage.

Tesco and Carrefour have combined revenues of £140bn. As has been widely publicised the strategic intent is to leverage increased buying power with suppliers, to reduce prices to end customers. They’re taking the war on price to the discounters.

There can be no clearer a demonstrator of intent than the news Tesco is bringing a discount proposition to market, possibly as early as September 2018 (‘Jack’s’ is being touted at the retailer name at the time of writing). Clearly the Carrefour deal will be looking to support the initiatives profitability, something Sainsbury’s struggled with in it’s joint venture with Netto in 2016.

2. The Discounters

There’d be every reason to think the discounters would be looking over their shoulders nervously. The supermarkets are looking to close, if not eliminate, the price gap. Compounding this, the supermarkets have well-established multi-channel operations, vast supply chain infrastructure and are increasingly innovative in in store customer experience. Nevertheless, on price alone, Aldi and Lidl have both shown resolve in reassuring customers they won’t be beaten on price regardless of consolidation.

The discounters are by no means standing still. Pricing, as an isolated strategy for competitive advantage is short termist, and the market was always going to respond. In recent years the quality of private label products has significantly improved. In June the Master of Alcohol awarded gold medals to two Aldi own brand Scotch Whisky and Single Malts, beating competition from premium Whisky brands. And this is by no means an isolated incident.

This improvement in quality has seen consumer demand, and with it revenues, increase. The sales performance is an enabler to growth in the number of stores in the UK estate. In 2017 Aldi opened 76 stores, bring its total to 762, with a further 70 openings planned for 2018. The growth plan targets a further 1000 stores by 2022.

And it’s not simply a numbers game. In the last 10 years the average square footage of discount stores has increased by 16%. The additional space is being used wisely. In June IGD reported Simon Wainwright, Director of Insight at IGD as saying: “Food discounters are benefiting from targeted investment in key categories such as fresh produce, meat and bakery, along with improvements to the in-store environment and facilities, making stores much more comparable to supermarkets.”

The discounters continue to evolve their proposition in line with consumer demands. Earlier in the year Lidl announced the introduction of 28 new organic lines - all of which were highly competitively priced. It’s not difficult to picture the discounters moving into the food to go space in the not too distant future.

The discounters clearly recognise the importance of in store experience. The days of ‘hard discounters’ piling high and selling cheap are behind us. This is perfectly illustrated in Lidl’s investment of £1.5bn over a 3 year period (the initiative commenced late 2015) in the ‘Lidl of the Future’.

In June Aldi won the grocer gold ‘Grocer of year award’. Rather than looking nervously over their shoulders, the discounters are clearly looking at a bright future.

The rise of the discounters has been propelled by two primary factors. Low prices and improvements in public sentiment. In economically challenging times value is more important than ever, and in the years following the financial crash, the discounters capitalised on the opportunity this presented. Offering substantially lower prices for comparable products became key to gaining competitive advantage.

3. The Consumer

When considering consolidation from the perspective of the consumer, we should first revisit the ‘Why?’ of consolidation. The market is responding to an increase in competition. The oligarchy of the ‘big 4’ is no longer sacrosanct. Competition fuels consumer benefits, whether through reduction in product pricing, or in customer experience innovation.

The challenge with this is that consolidation reaffirms the oligarchy. It could be argued that it’s a counter-competition move. Which obviously has negative connotations for the consumer.

The reduction in product pricing creates a pinch someone needs to bear. Given the potential buying power of these retail giants, the natural conclusion is that suppliers and manufacturers will be squeezed to reduce costs, in return for significant supply deals. Logic would suggest only those suppliers and manufacturers solvent enough to accomodate the margin impact will retain a seat at the table. This potentially closes the route to market for smaller suppliers and manufacturers who cannot sustain supply deals absent of profitability. Could this impact the democracy of choice for consumers?

In the ‘big 4’ possibly, however elsewhere it could actually benefit consumers.  Shopping behaviours are shifting towards convenience, with ‘buy less, more frequently’ becoming increasingly prevalent.

Tesco’s purchase of Booker, the Co-Op purchase of Nisa and the supply agreement between Morrison’s and McColls is demonstrative of the recognition of the growth potential for convenience. With such supply chain backing, these convenience stores could start to benefit from improved access to range, most significantly in fresh and private label, which in turn offers enhanced value to those convenience led consumers.

The impact throughout the grocery ecosystem is unlikely to be immediate. The dust needs to settle on deals done, and the businesses need time to work out how best to structure themselves for the benefit of the consumers. Ultimately it is consumer engagement which sits of the heart of success or failure for these retailers.

Without question the future is fascinating.

In the second part of this article I’ll look at consolidation from the perspective of traditional wholesalers, independent manufacturers and independent retailers.

To find out more about Answer and the work we do, contact me on This email address is being protected from spambots. You need JavaScript enabled to view it..

About the Author...

Rich heads Answer Digital Retail, delivering world class solutions to clients including Costcutter Supermarkets Group, FCUK, Arcadia and Ramsden International. Richard has a passion for retail and the transformational impact technology is having on customer experiences.