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The dynamic of UK fine food market shifted dramatically from March 2020 as the pandemic began. With Government guidance to stay at home as much as possible, along with widespread caution around visiting busy places, such as shops, it is no surprise that demand for online food shopping surged. However, managing online demand didn’t come cheap. Although businesses benefited from higher revenues due to higher demand for food and drink items, greater use of online shopping came at a cost to profit to many retailers and loss of market share for others.
Online delivery and click and collect involves a hugely different logistical operation to traditional in-store purchasing. It requires investment, and adds significant additional service costs. In addition, the shift to online meant that impulse purchasing opportunities were reduced, and shopping transactions were made up of an increasing proportion of lower margin products.
In tandem with the shift to online, there was a large increase in grocery sales. As schools, workplaces and hospitality began to close down, people were forced to eat and drink at home. In the week ending 22nd March 2020 (just before the first lockdown was announced) data from Public Health England shows that the highest ever volume of food and drink sales was recorded. This was 43.6 percent higher than the equivalent week in 2019. While some of this increase was due to panic buying and stockpiling, sales volumes continued at higher levels, as illustrated by Public Health England figures for the four-week period ending 21st June 2020, where volume sales were still 17.7 percent higher than the same four-week period in 2019 – despite an easing of restrictions.
As people sought to minimise infection risk and time outside of home, basket size has increased with a trend towards the big weekly shop, particularly during lockdown periods. Whilst sales increased, margin mix took a hit – sales fell on many high margin products such as convenience food (affected by people cooking more at home) and non-food (caused by reduced in-store and impulse purchasing opportunities).
According to Public Health England, category sales with the largest increase quarterly increase up to 21st June 2020 were alcohol (27.6%), home cooking – savoury (26%) and sweet (23.5%), frozen meat (19.1%), savoury carbohydrates and snacks (18.8%) and frozen confectionery (17.8%). Families with the youngest child aged 0-4 years increased their purchasing most (up 22% on the previous year, while adults of working age without children also purchased 21% more groceries).
There are a number of challenges, which all point to pressure on both sales and profit. But will the market normalise and what will it look like? What will the new online sales baseline be? The future threat of the virus and variants is unknown, while there is further uncertainty about how the new norm of hybrid/partly home-based working will impact demand for fine food and drink purchases.
It is difficult to predict with any certainty what further twists and turns await the market, but demand for online shopping is likely to remain high, albeit at lower levels than during the peak of the pandemic. While some of the initial costs of online expansion have already been absorbed, higher service costs will continue, and retailers must find new ways to protect profitability. According to Statista, an estimated one third of UK consumers stated they would continue shopping for food online once the virus has subsided, but not as frequently. Just under a fifth of UK shoppers had no intention of buying groceries on the web post pandemic.
While shoppers prioritised convenience and safety during the pandemic, turning to online purchasing and demonstrating greater reliance and loyalty towards a single retailer, this behaviour is already changing. Not only will retailers have to sustain high levels of online business, but they will also face greater competition.
However, there are future opportunities fine food retailers can leverage:
Persisted market share will undoubtedly favour those with the most attractive online offering. But it is essential that retailers ensure that they are able to run their online business at an acceptable margin over the longer term, especially as competition and consumer expectations increase. To achieve this, retailers must undertake extensive profitability analysis across both products and customers to determine what is suitable for the online channel, and what is not.
With in-store retail already being a low margin operation, the additional costs add more pressure. The key to providing cost-effective e-commerce as a service is operational efficiency, with a relentless focus on cost. Supply chain collaboration and outsourcing may be the key to driving higher efficiency and recruiting reluctant online shoppers could provide an opportunity to further scale operations and efficiency improvements, thereby increasing margins.
With a much-increased proportion of grocery sales made via online channels, the consequent reduction of in-store footfall presents an opportunity to minimise and optimise utilisation of bricks-and-mortar premises. There are also good opportunities to optimise existing space, without compromising store accessibility, by forming in-store concession partnerships. This can drive new revenue, while also developing the customer experience and attracting new customers, who would otherwise shop online or with competitors.
Capturing, analysing and using data to better understand customer needs and create tailored sales and marketing strategies at a hyperlocal level will be key to improving customer service and retaining and attracting shoppers. It is important for fine food grocers to use loyalty schemes in ever smarter and more targeted ways to maximise market share.
Lockdown created a renewed appreciation for the environment and local community, so if retailers can source food locally to support regional producers and minimise food transport miles, they can meet the growing customer desire to shop more sustainably. This can provide a point of differentiation with competitors and provide opportunities to create higher margin product ranges. By shortening the supply chain, retailers could also benefit from reduced supply chain risk and cost.