Store Lockdowns vs.Online Limitations
COVID-19 Market Update – 03/04/2020
8 minutes to read
Introduction
This is the second of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores three key themes:
- Grocery demand and market trends
- Non-food demand and market trends
- Occupier fall-out to date
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• Grocery demand spikes by +21% over the last month
• Growth driven more by higher frequency shopping trips than stockpiling
• Online grocery grows by +13%, losing “market share” to store-based channels
• Major capacity constraints on online grocery growth
• High street sales inevitably slump (-34%)
• Online (+14%) only absorbing a portion of the demand slack
• Boots sees sales down -8%, despite being “essential” and stores remaining open
• Mounting CSR pressure on “non essential” retailers to cease online trading
• Retailer failures of Laura Ashley and Brighthouse not unexpected
• F&B failure the result of restructuring (TRG) or legacy private equity ownership (Carluccio’s).
1. Spike in grocery demand
With foodstores one of the few retail sectors deemed “essential” and ongoing reports of frenzied demand and panic-buying amongst consumers, some welcome quantification and perspective from market analyst Kantar.
In the 12 weeks to 24 March, overall grocery spending topped £10.8bn “even higher than levels seen at Christmas”. The busiest spell was from 16-19 March, when 88% of households visited a food store, adding up to 42 million extra trips across four days. The average household spent an extra £62.92 during the past four weeks, equivalent to adding five days' worth of groceries.
Over the period, overall supermarket sales grew by +20.6%. In terms of geography, London had the biggest increase, with grocery spending up by +26% during the month.
In essence, there are ordinarily three potential drivers of grocery market growth 1. Inflation 2. Frequency (or “trips” / “traffic”). 3. Basket Size (“ticket”). Interestingly, the key driver in recent weeks has been Frequency. Inflation is negligible (absolutely no evidence of foodstore operators hiking prices to exploit demand), whilst average basket size has risen only marginally. The unsavory images of consumers mercilessly clearing shelves into one basket is thankfully the exception rather than the rule. But consumers have been making numerous extra shopping trips and this has been the key catalyst to growth – very revealing, if also a little alarming in times of social-distancing.
Over and above assumed stockpiling, the other widespread conclusion is a massive flight to online – which is also only true up to a certainpoint. Kantar reported that online grocery increased by +13% over the period – not insignificant growth by any means, but below overall market growth (+21%). Online is currently losing “share” of overall grocery spend to other channels.
How so? Many may reasonably ask, given that many consumers have tried online grocery shopping shopping for the first time over the last couple of weeks and are “new converts”. The simple answer is capacity constraints. None of the grocery operators (Big 4 nor pure-play) has the ability to ramp up online capacity at all quickly, the main limitation being delivery vans. The store-based grocers can mitigate this by leveraging their store estate and upscaling on click & collect. The pure-plays (e.g. Ocado) do not have this option.
The manifestations of these capacity constraints are obviously very limited or very delayed delivery time slots. With these so limited, consumers are effectively forced to make interim store-based shopping trips. For every “new adopter” of online grocery, there is likely to be at least one “disillusioned abstainer”. This challenges the somewhat facile view by other “armchair analysts” that the current market will see an irreversible shift to online grocery. Two key representatives from Big 4 grocers I’ve spoken to this week have dismissed the notion of permanent changes to the ways people shop as “absolute rubbish”.
Current market conditions have also reinforced our mantra of stores and online working in harmony – this is arguably more true in grocery than any other retail sub-sector. Contrary to public opinion, very little online grocery is served from dedicated warehouses (Ocado being the key exception to this). The Big 4 have very few “dark stores” (distribution warehouses serving online that aren’t open to the public). Tesco has around six, Sainsbury’s and Asda one each, while Morrison’s doesn’t have any.
For the Big 4, online grocery is actually serviced by “instore pickers” – staff that run around store alongside everyday shoppers doing online shoppers’ orders for them. I would estimate 95%+ of online grocery is conducted this way.
Many of the major grocers have taken on additional warehousing space in these times of crisis. Again, many have erroneously assumed that this is to meet online demand. In the cases of Aldi and Lidl, neither actually offer a full online service. In the cases of the Big 4, this is to support heightened demand generally, as much store-based as online. They will not service online directly, the store will always be the “middle-man”.
Final point of clarity: customers walking their local grocery superstore and seeing an item out of stock won’t be able “to buy it online instead”. If it’s not available for them in-store, it won’t be available to the instore picker either, who will just be getting it from the very same place.
2. Non-food: the other end of the demand spectrum
This marked the second week of at least three of “non essential” retail lockdown. As it stands, it seems more than likely that this period will be extended far beyond the minimum of three weeks initially proposed by the UK government.
Footfall figures were inevitably dire. Statistics from Springboard showed that footfall was down -58.6% week-on-week and -81.1% year-on-year. Any footfall that was maintained centred around foodstores (e.g. supermarket-anchored retail parks). Many shopping centres are closed and therefore witnessing zero footfall.
Non-official retail sales barometers are also predictably negative. Figures from BDO saw the high street suffer its “worst sales fall on record”. Overall retail sales were down -17.9%, with high street in-store sales down by -34.1% on March last year, with fashion retailers at the brunt of this, with in-store sales plunging by -40.4%. I would venture this downturn owed less to “shoppers being cautious as to job security” as some have suggested, rather the fact that said shops were shut.
In the BDO figures, online sales were ahead by +13.7%. Although healthy growth (and predictable under current circumstances) this reinforces one of the key messages from last week’s Retail Note – online does not simply pick up the slack from lost store-based sales.
There is a growing division between non-food retailers as to the ethics of maintaining online operations during the COVID-19 crisis. The likes of Next, River Island, Moss Bros, TK Maxx and Net-a-Porter have closed their online arms in order to safeguard their warehouse staff. Other retailers maintain they are in full compliance of social-distancing within their warehouses. A CSR issue to be debated in the coming weeks…
Perhaps more surprisingly, Boots UK has recorded a -1.2% fall in sales for the first quarter. Sales in March have been down -8%, despite Boots being a designated “essential” retailer and the vast majority of its stores staying open during the wider lockdown. With consumer demand for healthcare extremely high, stores still up and trading, but sales down -8% - what does this say for retailers in other sectors where demand is virtually non-existent and stores are shut?
3. Early fall-out
As outlined last week, the COVID-19 pandemic will inevitably prompt considerable occupier failure. By their very nature, retailers and F&B operators are highly cashflow-dependent. Many have seen their cashflow turned off completely at a stroke. Those without the safety net of a strong balance sheet and substantial capital and reserves (or recourse to other means of cash) are highly exposed.
Laura Ashley fell into administration on 17 March. Although the stores have not formally shut on a permanent basis (although are subject to enforced closure), the administrators this week made 268 redundancies and placed the retailer’s remaining 1,669 store staff on furlough. To blame COVID-19 for the failure of the business glosses over the fact that it has been severely underperforming for many years. The administrators maintain they are in continued discussions with certain interested parties over a sale of the business.
On Tuesday, rent-to-own operator Brighthouse also appointed administrators (Grant Thornton). The business has a 240-strong store estate and around 200,000 customers. Again, the company has been on the brink for some time, having previously fallen foul of the Financial Conduct Authority (FCA) over questionable affordability checks and irresponsible lending.
There has also been fall-out on the F&B side. The Restaurant Group (TRG) has filed notice to put Chiquito into administration, a move which will permanently close the majority of the 81 Tex-Mex brand’s sites. Food & Fuel, the 12-strong London-based gastro-pub and café brand, is facing a similar fate. Again, this move is not a direct by-product of COVID-19, but part of wider ongoing business restructuring. In September last year TRG announced it would close over 150 outlets, de-emphasing certain brands (Chiquito and Frankie & Benny's) and focus more attention on others, notably Wagamama’s.
Carluccio’s appointed administrators on Monday. The chain’s 73 branches are already closed as a result of the government’s lockdown on all restaurants, cafes, pubs and “non-essential” retail, but the administrator is still seeking a buyer for all or parts of the business. Meanwhile, Byron Burgers has appointed KPMG, thus far in an advisory role.
That we are seeing failure in the F&B market is of little surprise. Many operators (including Carluccio’s and Byron Burgers) have already undertaken CVAs and these have provided temporary respite rather than permanent salvation. A forced lockdown will inevitably cause massive damage to F&B operators’ cashflow, but those with a legacy of private equity ownership are unlikely to have the requisite balance sheet strength to withstand temporary loss of trade.
Any structural or financial weakness will be cruelly exposed in the current environment.