THE recent catastrophic losses reported by Tesco, and with all its supermarket competition in varying degrees of difficulty (with the exception of the two discounters Aldi and Lidl), raises fundamental questions about the sector’s viability. Why, after years of remarkable success, have supermarkets suddenly and drastically gone into reverse?
Supermarkets in Britain are a relatively modern (50 year) phenomenon. They succeeded because of their remarkable capacity to innovate and they are struggling because they appear to have run out of ideas.
They will survive but will be constantly on the back foot.
Fifty years ago, local food shops were local, people shopped so frequently and unadventurously, visiting different specialist retailers – the baker, the butcher the fruit and veg shop, the fishmonger. Nearly everybody got their milk delivered to their doorstep. The supermarkets changed all that.
The first local innovation took place in the 1960s when the Leeds company, Associated Dairies, opened a giant store in Nottingham. It was the chairman Noel Stockdale, an astute but apparently cautious Yorkshireman, who made the investment, based on a visit to America.
Asda was able to buy in bulk, sell cheaply and achieve high levels of productivity in their vast stores. At the top end of the food retail market was M&S which was determined to sell high- quality perishable food through a national chain. Until then, fresh food was always sold locally.
M&S created a national cold-chain distribution system which enabled them to order centrally and apply tight controls over quality and safety. It also allowed them to source from small companies. My own company was one of them. We were a small dairy business in Hull to whom M&S took a fancy, and I organised the first load of yoghurt into the Liverpool depot in 1968.
Twenty years later, M&S had created a spectacular high quality food business and Northern Foods was supplying one third of their needs. M&S also saw a rapid increase in the number of working women, who were less inclined to prepare food at home. This gave them an opportunity to provide high quality, convenient, prepared food. And people, because of foreign travel, became much more adventurous about what they ate. M&S broadened its range to meet this demand. The others followed suit.
The third great boost for supermarkets was the mass ownership of cars which led to out of town shopping. Finally, in recent years, Tesco developed the Clubcard which enabled them to target their customers and respond to their demands.
As a result, supermarkets prospered for 40 years at the expense of traditional shops.
So what went wrong? The supermarkets forgot how to innovate. The size of the store spiralled to enable more of the same to be sold – Tesco were reported to be selling 10 different types of mustard.
The biggest restraint on growth was the availability of sites so they all, but particularly Tesco, embarked on a property buying spree.
The supermarkets then became victims of further social and technological changes. People began to shop locally again, several times a week. Local convenience stores flourished and the big supermarkets entered into this battle but ended up competing against themselves because their low-cost, limited range proposition diverted customers from their big stores.
The arrival of internet shopping further escalated costs, added complication, cost and reduced productivity. They all adopted high cost home delivery propositions, but in non-food sectors they could never match the prices of Amazon and other online competitors.
Interestingly, M&S and to a lesser extent Waitrose, appear to be doing better than the others because they have stuck to their strengths of product development and quality.
So Tesco, and to a lesser extent Morrisons, Sainsbury’s and Asda, have been caught with a lethal mixture of high-cost, excessively large stores, losing market share (especially in non-food sectors); in effect, a property disaster.
Tesco has been trying to satisfy the needs, in one store, of all segments of the market from the M&S shopper to the discount shopper – an impossible aspiration. Morrisons, which had been a very successful chain rooted in the North, went national when it acquired Safeway and seems to have lost its way since then. Asda and Sainsbury’s have been more cautious and suffered less.
So where do they go from here? Tesco’s initial reaction seems to be the right one – to drastically reduce the size and cost of their operation.
They will survive but will be constantly on the back foot. Niche sectors like M&S will prosper, if they continue to innovate.
But perhaps the best answer would be for the big companies to withdraw gradually from direct retailing and convert themselves into property managers. They might offer space in each store to a number of independent franchises who would be entrepreneurial in the way the supermarkets used to be.
It would be ironic if the supermarkets, who devastated the high street specialists over the past 40 years, were to hand back their shops to these same specialists in order to survive.
• Lord Haskins of Skidby is the former boss of Northern Foods and chairman of the Humber LEP.