Patrick Mitchell-Fox looks back at last year to work out why foodservice was buoyant compared to the sluggish retail channel.
IGD’s annual performance update on grocery and foodservice wholesaling shows that total sales in the sector hit £29.8bn last year. Compared to 2013, that’s up just a modest 1% and represents a distinct slowdown on that year’s growth levels.
This slowdown has moderated our growth forecasts and looking ahead to 2019, with few signs of an immediate pick-up, we see the sector reaching £32.3bn, which would be a compound annual growth rate of 1.6% over the next five years.
From this ‘helicopter’ view, last year looks to be a somewhat uninteresting story for wholesalers, with the channel in undeniably slow growth. Of course, this may seem unsurprising when set against the wider background of a food and grocery market struggling with an unprecedented slowdown. Indeed, every one of the big four retailers dropped into negative territory at some point during the year.
However, dig a little deeper and you soon see that 2014 was a year of striking mixed fortunes in grocery and foodservice wholesaling – and not in the ways you might have expected. It’s had us scratching our heads about the causes.
Retail channel growth was especially sluggish, at just 0.5%. But why so, when the core customer base in convenience retailing would seem to be a sector on the upswing?
Foodservice was notably buoyant in comparison. But with its dependence on discretionary spend, where did this come from, when non-discretionary spend seems to be under such pressure? It all seems rather counter-intuitive.
Let’s look at the retail channel first. Overall, convenience retailing has been growing very strongly. But is it reasonable to expect wholesalers to be getting the full benefit of this?
Recent growth in this channel has largely been driven by a ‘dash for convenience’ amongst multiples and co-operatives, rather than purely by traditional wholesale customers.
For multiples such as Tesco and Sainsbury’s, as well as relatively new entrants into the channel such as Morrisons and Waitrose, the focus on gaining scale quickly in convenience has led to hundreds of new ‘multiple’ convenience stores added annually in recent years.
In turn, wholesalers have been upping the ante in the struggle for new customers, building loyalty by recruiting retailers into symbol groups and other platforms such as retail clubs. These have been growing, but with the overall numbers of independent retailers level at best, this is often a battle for share, rather than a ‘new’ opportunity.
Growing symbol groups in this competitive environment has required investment. However, to repay their investment, wholesalers need symbol retailers to be loyal and 2014 was a year in which some operators grasped the nettle of rationalisation.
Nowhere was this more striking than at Musgrave. With new UK MD Peter Ridler on board, Musgrave took the step of divesting itself of some 200 ‘under-performing’ Londis retailers, which accounted for around 10% of the entire Londis estate.
With other operators such as Bargain Booze also taking stock, the growth of many symbol groups has been muted, affecting delivered grocery wholesalers above all.
The sense of 2014 being something of a transitional year was, of course, reinforced by the switchover of Costcutter’s supply to Palmer and Harvey. And whatever the initial turbulence of the change, there’s no doubt that Palmer and Harvey has emerged with its scale significantly enhanced for the future.
To call it a boom might be overdoing it, but with an annual growth rate of 2.5%, sales in foodservice, catering and hospitality look fairly feisty in comparison to retail.
And it has been the delivered foodservice operators, such as Brakes and 3663, that have been the primary beneficiaries, boosted above all by a vibrant, expanding customer base among the high street casual dining and food-to-go multiples, such as Nando’s and Pret A Manger.
The delivered operators are, of course, the real specialists in the channel, and their investment in range innovation and best-in class distribution service makes them the stand-out supply partners for ambitious, multi-site restaurant operators.
The strength of consumer demand in sectors such as casual dining is indicative of returning confidence in a recovering economy. But the contrast with restrained spending in retail channels may well show how consumers’ priorities have been altered by the years of austerity: consumers now value the ‘experience’ of consumption in foodservice over the simple ‘commodity acquisition’ of retail.
Despite the contrasting fortunes across different customer channels, there were nevertheless some upsides that ran right across the whole market in 2014.
The importance of the weather shone through and if there was a stand-out category, it was soft drinks, up a whopping 7% across the sector, showing the clear benefits of a decent bit of summer weather.
With smoking in public restricted to outdoor locations, good weather can also boost tobacco consumption and may help account for the reasonably resilient performance of this major category, although sales were still marginally down by 0.6%.
The long-term growth of chilled and fresh also remains a striking feature of the sector, with sales up a notable 4.1% across all segments and customer channels, even though the scale of participation in these categories varies hugely.
In our annual survey of online sales, we can see how the sector is now rapidly getting to grips with this new, digital world. Double-digit growth is the order of the day across all those wholesalers offering online ordering.
In the cash & carry segment, where it is driving change to the traditional ‘collect’ model, online now accounts for more than £1.1bn of sales – just about 10% of all segment sales.
The growth of online sales is helping to drive the extension of delivery services from cash & carry operators, although click & collect is also becoming more widespread. In 2014, the value of this reached £1.7bn – 15% of the cash & carry segment value.
So far this year, we have seen little to dispel the trends with which we ended 2014.
If nothing else, the year will definitely pose further challenges for retail channel wholesale, especially around tightening tobacco legislation. Added to the gantry cover-up hitting retail stores on April 6, there will also be a ban on smoking in private cars carrying children from the autumn, as well as the potential for the imposition of plain packaging on tobacco, following a parliamentary vote before the coming election. These are all likely to depress tobacco sales further.
For foodservice wholesalers, while government austerity continues to restrain growth among ‘contract’ customers, measures such as the launch in September 2014 of free school meals for all school children up to year three are providing additional opportunities. This is alongside the continued growth of sectors such as casual dining and food-to-go.
After many years of sector watching I know that outcomes can be very unpredictable and will depend on a complex interplay of factors, so watch this space and keep up to date with our wholesaling and foodservice research at our website.
IGD’s annual wholesaling conference on September 30 will also provide an excellent way to see how 2015 has shaped up, as well as a look at what’s coming down the line for 2016.
One thing is certain: come the end of 2015, the £30bn grocery and foodservice wholesaling sector will still be playing a massive role as a unique route to market for hundreds of thousands of businesses in independent retail and foodservice. And I’ll stand by that prediction.