It is a truism to state that we are living in strange times. How many people have we said that to in the last few months?

The implications for business have been articulated in the business literature and I do not intend to rehash them in this blog.

I have chosen the grocery business to consider how Covid has forced the major global food retailers to reassess their existing business models to take account of changes in buyer behaviour and shifts in shopping patterns.

In truth, Covid has not necessarily caused a sudden tremor for these retailers. For instance there has been an inexorable shift towards online shopping over the past few years.

In the United Kingdom, which is dominated by the “Big Four” retailers: Tesco, Sainsbury’s Morrison’s and Asda, online grocery shopping took some time to make inroads on visits to traditional “bricks and mortar” stores. By early 2020, online grocery shopping captured about eight per cent of all food sales in the UK. Since March 2020, this share has risen to around thirteen per cent. We should not be surprised by this. People who adhered to lockdown measures and restricted their movements availed of online shopping. They found it to be convenient and “hassle-free”.

However we need to take a “big picture” view of longer term trends and developments and their implications for future business models and marketing strategy in this sector.

In particular I am fascinated by the way in which we need to imagine or more specifically “reimagine” how supermarkets will look in five to ten years’ time. Will we see incremental change? Transformational change? I will argue that we are almost certain to see the latter happening.

Recently two brothers: Moshin and Zuber Issa teamed up with a private equity company called TDR Capital, to acquire Asda, one of the “big four” food retailers in the UK. They made their money when the established Euro Garage Forecourts to its present size of 6,000 such operations spread across ten countries.

Walmart, the giant US food retailer acquired a majority stake in Asda as far back as 1999. It continuously struggled to grow this business as it found that the dynamics and operations of the UK food retail sector did not conform to how Walmart operated in its US base.

In October it sold its majority stake to the EG group. We will revisit this purchase later in the blog.

Let us take a broader look at how the food retail sector globally has changed in recent years.

At the outset I argue that supermarket shopping is not necessarily something that most of us look forward to and enjoy. Much (admittedly not all) of the items that we purchase in our visits to the supermarket are functional in nature. There is nothing remotely romantic about purchasing toilet rolls, baked beans and instant coffee. Items such as the aforementioned toilet rolls tend to be commoditised.

This raises questions in my view. Why do we put ourselves through the misery of driving to shopping centres and malls to do supermarket shopping when parking is difficult, costly and that is before you enter the said store or outlet? When you are actively moving around the various aisles you are likely to be assaulted by shopping trolleys, impatient shoppers and screaming kids. Not, in my opinion, a very attractive prospect.

Will we change our behaviour? I believe we will.

Let us try to reimagine the typical large supermarket / hypermarket of the future!

Firstly the way in which such operations are structured and laid out will fundamentally change.

Currently most of the space is allocated to presenting a vast range of items to the visiting shoppers. A typical supermarket will carry anything from 40,000 to 50,000 items. This will be higher in the case of the larger hypermarket format.

With more and more people buying online, is there a need for such an allocation of space? No.

Increasingly the supermarkets of the future will reduce the space allocated to the display and merchandising of items and make more strategic use of space to operate as a distribution hub, a warehouse, a “click and collect” area, charging points for electronic vehicles to deliver online orders, a “drone” area and mobile shops.

Staff (initially) and in the longer term robots, will work side by side with shoppers as they pick items from the shelves for online orders that have been made by customers.

Items that do not require engagement or interaction by shoppers will be positioned in the adjoining warehouse. Only those items that appeal to the senses e.g. perfumes and electrical items, will feature in the display areas.

Supermarkets will redefine their business as operating in the “tech” sector as opposed to retail. We will continue to see the emergence of specialised tech companies such as Ocado. The latter is a good example of such an operation. It commenced operations in 2000 under the generic name of “Last Mile Solutions” and was backed by John Lewis Partnership – a well-known UK retailer.

It was a very significant evolution in my view as it married the basic principles of logistics with a customer-centric philosophy of offering shoppers a wide range of items at low prices. It fundamentally changed the trajectory of retailing: moving it away from the notion of retailing to supply chain management with an intense focus on the customer.

It currently (October 2020) has a market value of £21.7 billion. To put this in perspective, this is higher than Tesco – valued at £19.9 billion as of October 2020.

Some commentators that the global retailers and operators such as Ocado were stimulated into action by the initial move of Amazon into the food retail sector with its acquisition of Whole Foods Markets in 2017.

If we look at the traditional business models employed by the food retailers we can see that generally they have revolved around discounting and low prices, increasing the quality of own brands, diversifying away from food into such diverse areas as finance, pharmacies and insurance.

Arguably the most successful operators in the future will be those companies who sharpen their expertise in logistics and supply chain management. We have already seen upgrades in performance during the course of Covid. For instance Tesco has doubled its online capacity to 1.3 million online order deliveries. Asda has likewise improved its capacity to deal with over 700,000 orders weekly by the end of the summer of 2020. Such developments have led to the creation of thousands of jobs in the picking, packing and delivery areas of the business.

Critics of this development argue that there would appear to be no long term strategy at the heart of the food retailers operations. Some posit the view that it is only a ploy to keep increasingly promiscuous shoppers loyal to that supermarket group.

Others argue that it does not make sense to tie up the assets (bricks and mortar stores) with associated high rents and lease agreements. Instead they should be outsourcing or partnering with third-party operators such as Ocado.

Are we going to see a decline in investment in “bricks and mortar” grocery stores going forward?

The evidence from the UK suggests not. In 2020 developers and food retailers spent over £1.1 billion on investing in such stores. This is slightly lower than the ten year average of £1.4 billion.

Retailers such as Amazon and Alibaba have redesigned their store operations. In the case of Amazon they have developed the Amazon Go concept where shoppers are tracked by lasers and leave the store without having to queue up and pay (money automatically transferred from their accounts). Alibaba has over 200 of its supermarkets redesigned to reflect the changing technology trends. Staff pick items from the shelves, assemble the orders and place them on a track that operates over the heads of traditional shoppers in the store. They are shifted to another area of the store where couriers on mopeds then deliver them to the customers in as little time as thirty minutes.

The trend towards “tech”, “customer-driven” supply chains and robots appears to be inexorable.

Our old friend Asda, under its new owners, intend to insert an Asda format in many of its Euro Garage forecourts and work on the concept of creating mini distribution hubs within its portfolio of physical stores.

Interestingly it has established partnerships with companies such as The Entertainer. This company will take over the aisles that are devoted to toy products in the Asda stores. They will have full control over the ranges to be displayed, merchandising decisions and pricing. It is anticipated that this “test-and-learn” approach will be pursued with other organisations.

Arguably this addresses one of the shifts in consumer behaviour: the trend towards shoppers completing multiple shopping missions in a single trip.

In summary Covid had accelerated the move towards online grocery shopping. Uncertainty about when a vaccine will be readily available to society is likely to exacerbate this trend over the next couple of years.

The scale and size of physical supermarkets and hypermarkets will encourage the major food retailers to reappraise the value and contribution of their vast store portfolio.

Let’s see what happens going forward.

Discussion questions

1. Are retailers in danger of misinterpreting consumer behaviour when it comes to the food sector?
2. Are we going too far when we argue that food retailing in the future will resemble distribution hubs as opposed to traditional supermarket formats?
3. How important are cultural differences in terms of influencing consumer behaviour? Would this supermarket of the future work in your region?