The musings of a marketing guru…What awaits The Multiples as we mourn a united Europe.

June 29th 2016

A look ahead at what’s in store for the Grocery trade following Brexit, as told by Stir PR’s co-founder and Chairman Paul Seligman 

The UK retail trade is a tough business, and nowhere is it tougher than in Grocery. British Grocers, though largely opposed to Brexit, greeted it with a realism borne of the industry….in the words of The Co-op chief executive, Richard Pennycook:

“Our message is positive – we’ve been through a period of uncertainty and we now know the outcome. Now we need to get on and seize the opportunities.

In the short to mid-term, retailers face similar issues, a weak pound and the falling consumer confidence. However, some grocers are in a much stronger position than others. The pound presents a immediate issue as large amounts of fresh produce is sourced from the EU, consumers may also be surprised to find out that a British giant like Tesco, sources almost 50% of its butter and cheese  from milk sourced in the EU. Those retailers who have built up strong relationships with UK based suppliers will do better, especially in the short term. 

With this in mind, it is richly ironic that the European discounters, Aldi and Lidl, are likely to be net winners of Brexit. With limited ranges and exceedingly lean supply chains, they have also invested heavily in ‘localism’ – Aldi, for example, has a 100% British fresh meat policy. Lidl, who, in Germany has set aside £1.5 Billion over the next few years for expansion and improvement in Britain, will suddenly find that their Euros are worth a lot more. Needless to say, as consumer confidence falls, discounters do well. For them Brexit is a win/win.

One can’t help but feel a little bit sorry for Sainsbury’s having recently acquired Argos – a business reliant on high purchase intent, for they will confront some major challenges, people will always spend money on food, but in lean times delay or abandon the brown and white good purchases. The Sainsbury’s team may also want to reconsider their relationship with Dansk on its Netto joint venture. Tesco with significant investments in central Europe will be impacted by its ability to invest in them. Grocers with a large clothing  ranges, like  M&S, will encounter major problems as this sector has its own unique challenges (for example, sourcing material in India but producing in the EU) and will inevitably be hit by additional tariffs or costs, however, on the food front should do well since lots of its products are UK sourced.  For Asda, its owner Walmart, may be secretly pleased, given Asda’s recent dire profitability, any new investment will cost them less (though with subsequent declines in profitability). Morrisons is probably in a neutral position too, as it processes much of its food in the UK. Waitrose will be concerned that it competes at the top end and some of its consumers may look to trade down.

We should not forget that retailers are about to face a multitude of changes in food and labour regulations – which will utilise management time and resource. Fortunately they are a highly competent lot and will manage this efficiently and well – but it takes resource to do this.

So all in all, a tough challenge for retailers who will squeeze their supply chains and seek value wherever they can.  What we know for sure is that prices will rise and in all likelihood the discounters further expand. Against this backdrop we have the birth of Amazon Fresh. Tough times for retail – but then again – they are a tough bunch.