Competition intensifies in the battle for grocery market share

Contrary to popular belief, it is not just the largest players that are growing their market share; many second tier supermarket operators are also gaining ground, as are hard discounters such as Aldi and Lidl.

Market maturity begins to impact Tesco

While Tesco extended its lead over its rivals in 2007 for the ninth successive year, Verdict found that its 0.8 percentage point rise (to 27.6%) was the smallest market share gain since 2002. It was also the first time for five years that Tesco's share increase was less than the combined market share gain of its principal rivals (Asda, Sainsbury, Morrison and, formerly, Safeway). While Verdict cautions against interpreting this as a sign that Tesco is beginning to falter, the retail analysts do believe this reflects a stronger competitor set and the extremely tough comparatives the retailer has created for itself.

Nonetheless, Tesco continues to hold a clear lead over its rivals. Despite signs that growing market share is becoming harder, Tesco still recorded both the largest market share gain among the leading players and, due to Tesco's size, by far the highest cash gain in sales. Tesco's ambition and customer-driven approach to all facets of its business remain a potent formula. “One example of how Tesco still eclipses its rivals is that the retailer added more space during 2007 than its three key competitors combined, while an obsession with meeting – and surpassing – customer demands ensures high loyalty levels,” says Nick Gladding, retail analyst at Verdict research and author of the report.

Big Four continue to dominate

In 2007, Verdict estimates that the Big Four – Tesco, Asda, Sainsbury and Morrison – accounted for 65.4% of the £118.2bn market, up from 63.6% in 2006, and grew their sales (excluding fuel) by a combined £3.3bn during the year. These retailers not only outperformed the market, but also played a huge part in driving market growth, deepening their ranges in core categories, and expanding into new areas. The success of these retailers is based on the depth and make up of ranges, a value for money mantra and strong convenience credentials.

Asda, Sainsbury and Morrison all up their game

Number two Asda enjoyed a buoyant 2007. Achieving its strongest market share gain since 2004, the retailer now accounts for 14.1% of the market. Under chief executive Andy Bond it has simplified its operations and made significant changes to its product offer, customer service and marketing strategy, while maintaining and communicating its low price credentials. Furthermore, the retailer looks set to press on with the rollout of its Asda Living non-food only format and will develop an integrated online and in-store multichannel offer during 2008.

Sainsbury and Morrison have also made solid progress. Both have been in recovery mode and have achieved like-for-like and total sales growth as well as operating profit margin improvement in 2007. “Sainsbury has continued to develop its food offer, leveraging its brand values based around quality and value. It is also rapidly improving its complementary non-food offer and achieved particular success with its TU clothing range”, says Gladding. “Morrison, on the other hand is focusing on fresh food and low prices sold through its unique Market Street store format. Indeed Morrison achieved stronger like-for-like growth over its Christmas 2007 trading period than any of its rivals as changes implemented by chief executive Marc Bolland began to make a positive impact.”

Second tier operators gain ground

Beyond the Big Four, second tier of grocery operators such as Somerfield, M&S, Co-op Group and Waitrose are also growing in scale with each now holding a market share of between 3.0% and 4.0%. While Somerfield and the Co-op see their future in local grocery and convenience store retailing, both M&S and Waitrose have built propositions based on quality, ethical trading and value.

The merger of the two largest co-operative societies in 2007 has given the Co-operative Group a much-needed boost in operational scale while M&S aims to expand its food business through new food halls in department stores, standalone Simply Food stores and forecourt franchises. Waitrose continues to build its presence both organically and through acquisition. All operators are keeping a close eye on Somerfield for opportunities it could offer them, given the likelihood that it will be sold during 2008 by its venture capitalist backers.

Hard discounters grow share from a low base

Hard discounters Aldi, Lidl and Netto continue to grow share from a low base. The three Continental retailers all achieved strong double digit or high single digit sales growth in 2007. By improving their customer offer and enhancing shopping environments, they have boosted customer perceptions. However, given the strength of competition and expansion plans of major grocers, discounters are set to remain peripheral to UK grocery retailing.

Outlook for smaller players is bleak

According to Verdict Research, with just one of the Top 12 grocery retailers in the UK failing to add market share in 2007, the outlook for smaller operators and independent retailers looks bleak. “The grocery sector is rapidly consolidating and those without operational scale and a sustainable point of differentiation will struggle. Most leading grocers now have the capacity to open sites in any UK location and independent operators have no choice but to compete directly with them for business,” says Gladding.

While a supreme challenge, Verdict notes this can be done. Booths – a North-West based 26-store supermarket chain – has reported solid growth in recent years trading on its local heritage, and focusing on its core customers. “Other small operators can follow this model, providing customers with a tailored offer leveraging the flexibility that smaller operations have over larger national competitors.”

The report

*UK Grocery Retailers 2008 is a comprehensive analysis of the UK furniture & floor coverings market and its changing dynamics, with key performance indicators, including market shares of the leading operators.