The six victims of economic downturn in grocery retail
Falling oil and raw material prices in combination with the discounter threat will lead to a significant easing in grocery prices in Europe in 2009, while six main areas of grocery retailing will be adversely impacted by the economic slowdown. Opportunities still abound, however, with the potential to emerge stronger in the wake of the downturn.
The credit crunch has subdued many grocers’ ambitious plans for mergers and acquisitions, format diversification, international expansion and has put a stop to sales and leaseback deals. Meanwhile, the recessionary environment and financial crisis have dented sales of grocers’ non-food ranges and organic goods.
These are among key conclusions drawn from a report published by Verdict Research, part of the Datamonitor Group.
2008 was a very good year for the European grocery sector with most growth driven by inflation due to exceptionally high oil prices and agricultural raw material price increases. As prices rose grocers reported healthy top and bottom line figures. Food price inflation ran at unprecedented levels, and enabled retailers to prop up their cash profits. As a result the European grocery market grew to €901.5bn in 2008.
However, both trends – high food price inflation and high oil prices – have now reversed. The oil price has fallen back to below US$50 a barrel, less than a third of its peak of more than $150 just a year ago. A glut of better harvests has driven up supply and depressed prices. Adding to the downward spiral of prices are European discounters such as Aldi and Lidl with the influence they exert on price, according to Verdict.
While price reductions will be dependent on currency fluctuations, the competitive environment in various EU countries, the different time lags involved in food production and not least the behaviour of manufacturers and suppliers, Verdict Research believes that falling oil and raw material prices in combination with the discounter threat will lead to lower prices in grocery across the EU in 2009. Last week, an Australian agriculture expert predicted prices here could fall as much as 15 per cent.
“While grocers are to a certain extent insulated against the downturn that is severely hurting the rest of the retail sector, the effects of the credit crunch and the onset of the global recession will still be felt across the European grocery market,” Daniel Lucht, European retail analyst at Verdict research and co-author of the report, advised. “Real estate bubbles have burst, credit availability is curbed and unemployment is rising again. As a result customers have become cautious. The result has been an overriding focus on value from a consumer’s point of view.”
Pushing price increases through, as some hard up producers will demand from retailers, will be extremely difficult in the current economic environment.
Verdict Research has identified six main victims of challenging conditions in the European grocery sector.
- Non-food at grocery stores
- Merger & Acquisition activity
- Format diversification
- International expansion
- Sale & Leaseback deals
Several grocers have suffered declining sales growth of their organic ranges as customers feeling the squeeze struggle to pay the premium charged for these products, Verdict reported. Meanwhile, non-food ranges, which have in the past helped grocers attract footfall and reap the benefits from the higher margin of these products, are no longer pulling in customers as they used to. This has been seen at stores like Marks & Spencer and Tesco in the UK across to Wal-Mart in the US. The hypermarket, popular in the northern hemisphere, but which has never taken off in Australia, is losing favour. Apart from inflationary pressures from exchange rate fluctuations and higher wages in producing countries, the non-food sector is also suffering from a slump in demand for home-related product, especially in countries where the housing market has crashed.
The credit crunch has brought a halt to most M&A activity. “Tightened credit has made financing for any major deal almost impossible to get a hold of,” Mr Lucht noted. “Furthermore while opportunities may exist, in the wake of the crisis any risky investments on the part of both retailers and the financial community are off the agenda for the time being.”
Investments such as store refurbishment, multichannel and format development and innovative ideas to renew the sector have been firmly put on the back burner. Similarly, the pace of international expansion is likely to be subdued as retailers will struggle to raise capital in a recessionary environment and are in any case suffering from a general freeze in liquidity. Another victim of the credit crunch has been sale & leaseback deals, with property prices falling off a cliff, appetite for retail real estate has been reduced significantly.
Despite the grey skies hovering above, Verdict Research believes that there are still opportunities in the market. Significant chances lie in ramping up private label development, gaining more efficiencies in buying and supply chains, cutting unnecessary costs, lateral diversification and in green retailing. Verdict Research believes that organics will be one of the first sectors to bounce back in the post credit crunch era.
“Retailers with the necessary financial muscle should not let this crisis go to waste without emerging far stronger from it,” Simon Chinn, co-author of the report, concluded.
Campbell Soup Company (NYSE: CPB) announced today that it has signed a definitive agreement fo...
A leadership change has been announced for New Zealand dairy giant, Fonterra.
Researchers at the Imperial College London have criticised the switch from sugar beverages to artifi...
Pharmaceutical giant, Bayer AG, has acquired global agricultural company, Monsanto, in a USD $66 bil...
Tyson Foods, Inc. (NYSE: TSN) announced today the successful completion of the acquisition of the T...
US President-Elect, Donald Trump, has announced America will leave the Trans-Pacific Partnership (TP...
Australian farmers are worried that the overtly hostile rhetoric of President-elect Trump toward imp...
A new sugar content certification program called ‘Sugarwise’ is gaining traction in the United State...