Patrick Mitchell-Fox, Senior Business Analyst at IGD, assesses the challenges and opportunities facing the UK’s wholesale sector
It’s fair to say it’s a bit of a mixed bag for wholesaling at the moment. Released in 2016, IGD’s latest research on the UK grocery and foodservice wholesaling channel showed a market achieving only fractional growth in 2015, with total sales up just 0.3%. This was a further slowdown on 2014, when growth came in at a stronger, but still modest 1.0%.
This experience is hardly unique to wholesaling. As we know, the impact of persisting deflation and sluggish consumer demand has also been restraining growth across the wider world of grocery retailing, despite the rapid growth seen in channels like discount and online. The recent vote for Brexit has also brought about new levels of uncertainty.
However, with the return of some medium-term inflation underpinning our assumptions, the latest IGD forecasts predict average growth rates of 1.3% for the next five years in wholesaling.
Specific challenges to address
Of course, as well as the wider economic headwinds, wholesaling continues to face into some particular challenges of its own. Above all, the long-term decline of tobacco has a disproportionate impact on the sector. Still now accounting for more than 30% of the total wholesale market value, the category was down 1.6% in 2015, having a significant impact on wider performance.
And the impact of tobacco on wholesaling performance is perhaps only likely to intensify as plain packaging now rolls into the category. This perhaps robs tobacco of its last available consumer-facing marketing platform, eliminating not only branding but also any value messaging by disallowing price-marks.
From this sort of perspective, wholesaling may look like unpromising territory for any operator or supplier looking to grow sales in the channel. However, as with many a top-line view, there are different perspectives to be had at a more granular level.
Something to dine out on…
Last year proved again that at a time when consumers are more value sensitive than ever in their grocery shopping, paradoxically the willingness to spend on eating out has never been greater. Fuelled by a growing customer base of businesses in the rapidly evolving high street casual dining and pub dining sectors, as well as food-to-go, foodservice wholesalers have continued to buck the wider trend. The specialist delivered segment was up 2.3% in 2015.
And all the indications are that this trend will continue as the UK happily embraces out-of-home consumption, not just as an occasional treat, but increasingly as a part of daily life. Reflecting this, our forecasts put delivered foodservice growth well ahead of the sector average, reiterating that for those searching for future opportunities the out-of-home channel will bear some scrutiny. The caveat is that in foodservice, anyone looking for a slice of the action has to consider carefully where and how to play. It’s crucial to recognise differences within the segment, especially in customer behaviours and dynamics, as well as how best to engage.
Good prospects remain for retail
Of course, all this further emphasises that the present downside in wholesaling is concentrated within the retail channel business, by which we mean independent convenience retailing. Here the challenge in the last few years has not just been attrition amongst non-affiliated retailers, but a striking slowdown in the growth of the symbol sector. The latest IGD convenience statistics show that symbol store numbers actually fell by 0.7%, the first decline in many years.
So that leads to the question, could the number of symbol stores have peaked? It’s certainly true that growth-on-growth must get harder. However, the drop in store numbers is rooted in short-term structural change and disruption. I believe that once this has passed, we should see growth reassert itself again in the coming years.
This may be little encouragement to those looking for growth in wholesaling now. However, I would argue we cannot be fixated on top-line growth as the only source of opportunity.
It’s clear, for example, that within wholesaling there are some outstanding retail-focused performers, such as Dhamecha and United Wholesale, who are successfully expanding their depot networks and growing share. There are also up-and-coming businesses such as Abra Wholesale in north London.
Look to the wider market
Furthermore, it’s important to see potential opportunities for wholesale in terms of the relative performance and dynamics of the wider world of FMCG. Above all, it’s clear that current growth rates among the major multiple retailers represent an ongoing opportunity for wholesale. For many suppliers working with the major multiples, range rationalisations have a disproportionate impact on them, and therefore the need to actively seek to drive business in other channels to offset this is all the greater. Having under-used the wholesale channel, many suppliers could now have room here to grow, and the opportunity is there to invest and realise that potential.
Recent years have indeed seen many suppliers putting more focus into the channel. We have all become familiar with strategies including price-marking, smaller case sizes and core ranging. We are also seeing more and more suppliers seek to engage more directly with retailers, to provide effective communication and support activation with field sales.
This in turn is making wholesale a more effective channel in which, though overall growth may be limited, there are gains to be made. Having suppliers, wholesalers and retailers aligned in their objectives makes meeting specific trading goals much more achievable.
The next stage of this sector’s evolution will be to sustain and develop these benefits, by understanding what works best and how. And it’s against this background that IGD has shaped the agenda for its conference Wholesaling 2016, to share insight and boost understanding of how wholesalers, suppliers and retailers can ensure the ‘route to market’ emerges stronger from this period of uncertainty.