Understanding our operating environment
Since the deep recession 10 years ago there has been a structural change in consumer behaviour towards value-conscious choices. Although Irish consumers are positive about their spending outlook, the shopping habits developed during the recession have not been forgotten. This has led to smaller average basket sizes and a greater level of promiscuity as shoppers spend across a wider range of store options.
Online options made it easier for consumers to seek out value, which in turn change how they engage with stores. Christmas 2017 was a victim of this, with deep Black Friday discounting disrupting consumer spend in a key trading period in terms of revenue and profit generation.
Groceries however remain predominantly a ‘bricks and mortar’ channel with low but growing penetration of online.
The grocery sector overall returned to growth this year and the persistent gap between sales value and sales volume growth started closing in recent months. This would suggest that retailers are finally beginning to extract some value growth from what has been a highly competitive, price-obsessed market over the last decade.
There has been sustained grocery deflation in the Irish market with the cost of food decreasing. This is putting ongoing pressure on wholesale and retail margins. On the upside, in many cases where deflation has occurred because of changes in the €/£ exchange rate, the lower cost of goods yielded a dividend to retailers as retail pricing did not always track the lower cost of goods.
In the supermarket sector, the three largest competitors have very similar levels of market share and continue to vie for top position. Competition remains intense and geared towards discount options. Consequently, BWG Foods has had to invest in pricing support to EUROSPAR retailers to ensure that they remain competitive within the supermarket segment.
BWG invested in the wholesale pricing of key impulse categories such as soft drinks and confectionary to ensure competitive pricing on the best-selling lines on our wholesale price from the distribution centre. Competitor prices are tracked weekly and our prices amended accordingly to match the lowest competitor price. This ensures that the distribution centre is aligned to its key competitor set – an important guarantee to retailers and an assurance that they are consistently able to buy at the very best prices available on categories where profitability is key to the retail model.
The Kantar Worldpanel, a world leader in consumer knowledge and insights based on continuous consumer panels, describes Ireland as ‘Europe’s most competitive grocery landscape’. To match or outperform the market in terms of growth will continue to be a significant achievement for BWG Group.
In the UK market we saw several acquisitions of competitors by the large multiple supermarket operators.
Food inflation is forecast to rise with uncertainty over Brexit, the value of the sterling and weather impacts following a wet winter and an exceptionally hot summer putting pressure on the agriculture sector. Half of Britain’s food is imported, with 30% from EU countries. Food prices have varied by commodity type, with an average 2.9% like-for-like inflation during 2018. Forecast for food prices post Brexit vary widely.
Above-inflationary increases in labour rates – resulting from government-introduced changes to the National Living Wage and National Minimum Wage – impacted overall wage costs for wholesale and retail businesses.
Regulatory changes remain a significant threat to total category sales in Ireland, particularly related to the alcohol category. The Public Health (Alcohol) Bill was signed into law by the President on 17 October 2018; each module within the legislation requires activation by the responsible Minister and no activation has yet been triggered.
There has been a long period of consultation on the Alcohol Bill and the structural separation element has been substantially diluted from the original draft bill. In terms of minimum unit pricing (MUP), this is unlikely to be introduced in the near future based on the uncertainty of the seamless border and the need to balance pricing across the island of Ireland.
The potential impact of legislative and other tariff or duty changes post Brexit remains significant and unquantifiable at this stage, based on the uncertainty of the final solution post March 2019.