How much can the Australian grocery sector learn from the European experience?

Posted by Daniel Palmer on 14th May 2009

The European shopper has changed in much the same way as their Australian counterparts and the industry has been forced to respond, attendees of Highlands 2009 heard today.

Joanne Denney-Finch, CEO of IGD – a leading group of experts on the food and grocery industry, reported on the changes consumers have been making which have seen trends towards private label and discounters.

“Most shoppers are creatures of habit,” she said at AFGC’s Highland Conference. “And in the good times, in the developed world, they grew more cash rich and time poor. But in recession, many are trading time back for cash.”

“So in the UK we’re now eating more at home, instead of at restaurants…cooking more from ingredients…shopping around more…taking more time over our choices…cutting food waste…preparing more lunches at home…and even growing more of our own food.”

The contest to deliver value has never been so strong in the industry, Ms Denney-Finch said. And manufacturers are being forced to contend with the trends toward private label and discounters.

In the UK, private label share is markedly higher than Australia thanks largely to trailblazing retailers like Marks and Spencer and it is still growing, with budget own label soaring by 42% last year amid a deepening recession.

“They’ve encouraged a very sophisticated base of suppliers, doing things differently, pushing back the technical boundaries and developing entirely new categories like chilled ready meals and prepared sandwiches,” Ms Denney-Finch explained.

“It’s now multi-tiered … with not only “good, better and best” levels of quality but also healthy options, organic children’s ranges and foods for special diets.”

Own label commands an average market share in the UK of 47% as opposed to around 23% in the Australian grocery sector.

“It’s taken over thirty years for own label to reach this position in the UK,” she advised. “But now the precedent has been set, others can follow much faster … and own label has grown its share in each of the 18 European countries tracked by Nielsen over the last 5 years.”

Discounters, with their commitment to private label, posed “a second big threat to the leading brands”, according to IGD.

“In Germany, often called the home of discounting, Lidl and Aldi now hold a 35% share of the grocery market between them,” Ms Denney-Finch reported. “Whereas in Spain, almost half the population has been buying either more from discounters, more own label or both over the last year.”

“Some people call all of this activity “downtrading” but you have to be careful … shoppers don’t always see it that way. A fifth of British shoppers told us that they’ve been eating better recently … whereas only a tenth are eating worse.”

Economising should not be confused with downtrading, IGD contend, with a focus on saving cash without sacrificing quality often prevalent.

“Own label provides one route for this and as you can see from our latest research, a majority of European shoppers feel that quality standards have been improving,” Ms Denney-Finch noted. “So the growth of discounters in Europe is not just down to hard-up shoppers anxious to save money.”

“Of course Australia may not follow the same path,” she cautioned, “but it’s good to share the experience.”

There was no longer a “hiding place for anyone who doesn’t offer a genuinely good deal” but “value and not just price” is behind consumer decisions in the current climate.

National brands still have support
“Some of the most famous brands … those with a very long history, like Heinz ketchup and Kit Kat have also been booming,” Ms Denney-Finch said. “In the middle of a shake up, many people are returning to old values and finding comfort from the products they and their parents grew up with.”

Supermarket aisle - shopping trolley

Suppliers and retailers are desperately seeking to protect their volumes, with 28% of companies having cut prices, 43% running more promotions, 42% adjusting pack sizes and only 12% indicating they’ve taken no action yet to reassert their value credentials.

Promotional activity is now firmly focussed on price cuts rather than additional product (e.g. buy one get one free).

“None of this has been terribly sophisticated … but it is delivering great value for shoppers,” IGD’s Chief Executive remarked.

The negotiations between retailers and suppliers have become more heated but retailers haven’t had it all their own way as emerging countries present new opportunities for manufacturers.

“As one of our members put it: ‘we have a factory in Bucharest. When our trucks leave, they can either turn east or west, depending on where we get the better deal.'”

Innovation, which stalled last year according to the figures showing the rate of new products, is improving once again with 29% of manufacturers increasing spending on new product development this year compared with only 9% cutting it back.

“The problem is that many retailers are simplifying, rather than extending their ranges this year,” Ms Denney-Finch said. “So, competition for store space is getting even tougher and only breakthrough innovations are making it onto the shelves.”

“Another massive trend across Western Europe has been the rise of ethical shopping,” Denney-Finch noted. “In Australia it’s all about organic, but across Europe it is also about fair trade, the environment, animal welfare and buying locally.”

Price remains more important to shoppers overall but they are definitely more aware of the issues and increasing their spend on ethical products.
Retailers and manufacturers are forging ahead on sustainability and ethics, despite the economy, with an IGD survey of 230 managers across 24 countries last year discovering that 9 out of 10 companies had a sustainability policy in place with sustainability seen as an opportunity and not a burden.

Fair trade is fast becoming mainstream, IGD has reported, with retailer Sainsbury’s now only selling fair trade bananas. Tate and Lyle converting all of its sugar contracts to fair trade and Cadbury doing likewise for cocoa.

“Other big companies gearing themselves up include Unilever, Kraft, Mars, Nestlé and Sara Lee … so it’s a heavyweight response,” Ms Denney-Finch advised.

Similarly to Australia, health has come under the spotlight and a number of brands are now starting to make strong commitments in terms of reducing salt, sugar and/or saturated fat.

Lasting changes
The change in the grocery shopper has been remarkable and many of these shifts are likely to stay around for a while, according to Ms Denney-Finch.

“Thanks to the recession we’ve seen five years’ worth of shopper changes compressed into the last twelve months,” she stated. “It means we’ll see new habits formed for many years to come. Of the people who’ve been economising on their grocery shopping this year, three quarters told us that they won’t change back, even if their finances improve.”

The need to make a meaningful and long-lasting commitment to sustainability remains the most pressing issue for the sector, Denney-Finch concluded.

“We can’t put sustainability on the back burner … because unless we address it we won’t create a stable recovery,” she insisted. “By “sustainability” I don’t just mean the environment. I mean a completely durable system that will stand the test of time.”

“Plainly, the grocery industry doesn’t have all the answers right now … but we can’t afford to wait for others to find them for us. If we fail on food, it would bring even more desperate hardship.”