Retail Spotlight: modern grocery retailing puts manufacturers under pressure

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Modern grocers' value market shares

Modern grocers' value market shares

In the first Retail Times and Euromonitor International Retail Spotlight feature, Jon Wright, head of retailing research at Euromonitor International, considers the global impact of modern grocery retailing

 

 

 

The pace at which grocery retailing is modernising on a global scale is quickening.

This trend will continue to be seen up until 2016, by which time modern grocery retail channels will account for more than 50% of value sales in all but two regions, Latin America and the Middle East and Africa.

By 2016, Euromonitor International forecasts almost two-thirds of all value sales will be generated through modern grocery channels globally. While consumers in North America and Western Europe will make more than 80% of such purchases in modern channels, the strongest shifts away from traditional grocery channels will occur in Eastern Europe and the Middle East and Africa.

Although Eastern Europe has been on the radar of its Western peers ever since the end of the Communist era, the Middle East and Africa is only now beginning to attract considerable attention. Many see Africa; with its young and expanding population, which should benefit from strong financial growth in the future as long as the global economy holds up; as likely to provide long-term sales growth, particularly as modern grocery channels account for a relatively low share of sales in 2012.

Independent small grocers, in both developed and developing markets, have been affected in this transition, with their share of packaged food sales falling. Independent small grocers are less able to compete with the low retail prices of modern formats, nor are they able to absorb – or compel manufacturers to take on – rising production costs.

Modernisation benefits consumers’ pockets and hurts manufacturers’ bottom lines

The growth of modern grocery channels will mean manufacturers of food, drinks and homecare products, among others, will either be negotiating with global giants like Wal-Mart, Tesco and Carrefour on an increasing basis or retailers with regional aspirations, such as Cencosud SA in Latin America and Lawson Inc or Itochu Group in Asia Pacific.

Although this squeeze will be positive for consumers, who are likely to benefit from stagnating prices, manufacturer margins are likely to become ever more squeezed. Underlining the pressure being applied by retailers, the average global retail price of packaged food has steadily fallen in real terms since 2006, irrespective of sharply rising food input costs over both 2007/2008 and 2010/2011.

Economic factors likely to boost modernisation trend

Against a poor economic backdrop that is hitting consumer confidence on a global basis, the opportunity for price wars to emerge between retailers is only likely to increase. 

In the UK, Tesco and Asda are acting more like discounters in their food pricing strategies in order to prevent consumers switching to discounters like Aldi and Lidl, while similar patterns are being repeated in other Eastern and Western European markets. 

In South Africa, Massmart and Wal-Mart started 2012 by announcing an extended price-cut promotion, underlining how this is not just a developed market trend. 

The movement towards modern grocery retailers, therefore, is only expected to be boosted by economic weaknesses which will encourage consumers to search out the cheapest prices. Whether or not modern channels really do provide the lowest prices is, of course, debatable but; having convinced consumers they do, these channels are likely to drive home the advantage, accounting for an ever greater share of consumer spending in the future.

Source: Euromonitor International, Retailing Industry

Please note:

Euromonitor International’s modern grocery retailing channel comprises convenience stores, discounters, forecourt retailers, hypermarkets and supermarkets, while traditional grocery retailing includes food specialists, both store- and market stall-based, and independent small grocers.