Grocery Futures The Future of UK Grocery Retail - Summary Report - WRAP
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Grocery Futures
The Future of UK Grocery Retail
Summary Report
Prepared for WRAP (the Waste & Resources Action Programme) by the IGD
August 2006
www.wrap.org.uk
Contents
FOREWORD 5
EXECUTIVE SUMMARY 6
INTRODUCTION 8
THE COMPETITIVE ENVIRONMENT 9
THE RETAIL GROCERY MARKET 9
RETAIL STRATEGIES 9
The future and the market 12
Implications for packaging and food that households
throw away 14
SALES CHANNELS 14
The future of sales channels 15
Implications for packaging and food that households
throw away 16
INTERNATIONAL / GLOBAL RETAILING 17
The future for global retailing 17
Implications for packaging and food that households
throw away 18
POLITICAL FACTORS 19
REGULATION 19
General Regulation 19
Planning Law 19
The Future and planning regulation 19
Competition Law 20
The Future and competition regulation 20
Food safety, nutrition and labelling 21
Implications for packaging and food that households
throw away 22
Waste-related legislation 22
The Future and waste-related legislation 24
Implications for packaging and food that households
throw away 24
Corporate Social Responsibility (CSR) 25
SOURCING AND TRADING 27
The future and CSR 28
Implications for packaging and food that households
throw away 28
ECONOMIC FACTORS 29
ECONOMIC PERFORMANCE 29
Inflation 30
Employment 30
Distribution of Income 30
The future and economic factors 31
Implications for packaging and food that households
throw away 32
Contents
RETAILING COST BASE 32
The future and the retail cost base 35
Implications for packaging and food that households
throw away 35
THE EUROPEAN ECONOMY 35
The expansion of the European Union 35
European Monetary Union 36
The future and the European economy 36
Implications for packaging and food that households
throw away 37
SOCIO-DEMOGRAPHIC FACTORS 38
DEMOGRAPHIC TRENDS 38
A static population 38
An ageing population 39
Single person households and decreasing
household size 40
Working and leisure time 41
The future and social factors 43
Implications for packaging and food that households
throw away 43
FOOD PURCHASING TRENDS 44
Shopping in the convenience channel 45
The future and purchasing trends 46
Implications for packaging and food that households
throw away 46
MEAL OCCASION TRENDS 47
Informal meals 47
The future and meal occasion trends 48
Implications for packaging and food that households
throw away 49
FOOD CONSUMPTION TRENDS 49
Convenience 50
Healthy eating 51
The future and food consumtion trends 53
Implications for packaging and food that households
throw away 53
CHANGING CONSUMER TASTES 54
The future and consumer tastes 54
Implications for packaging and food that households
throw away 55
TECHNOLOGICAL FACTORS 56
PACKAGING 56
ADOPTION OF NEW TECHNOLOGIES 57
Contents
The future and new technologies 57
Implications for packaging and food that households
throw away 58
TECHNOLOGICAL TRENDS IN THE HOME 59
The future and home technology 60
Implications for packaging and food that households
throw away 61
TECHNOLOGICAL TRENDS IN RETAIL 62
Radio Frequency Identification Tags (RFID) 62
Loyalty cards and customer data 63
E-commerce/Internet sales 64
The future and retail technology 64
Implications for packaging and food that households
throw away 65
TECHNOLOGICAL TRENDS IN FOOD PRODUCTION 65
Functional foods 65
Biotechnology 66
Nanotechnology 67
Consumer confidence 67
The future and technological trends in food production68
Implications for packaging and food that households
throw away 68
TECHNOLOGICAL TRENDS IN GARDENING 69
The future and gardening 69
Implications for packaging and food that households
throw away 69
Foreword
Mark Barthel,
Special Adviser Retail Innovation, WRAP
As an enactment agency of DEFRA, WRAP (the It did so, not only to further our understanding
Waste & Resources Action Programme) is in the and the understanding of those we work with,
process of delivering a focused and coherent but also because intelligent analysis of data and
package of work designed to accelerate resource trends leads to more thoughtful and appropriate
efficiency in the UK. It aims to do this by reducing anticipation and deeper involvement of all
the volume of waste generated and maximising stakeholders. This summary blends hard facts
the use of recycled materials in the economy. with broader vision, inviting all those who work
with, or for, food retailers and manufacturers to
One of the main drivers for our work is the
participate in an exciting and creative future.
recent EU Landfill Directive. These regulations
mean that the UK will not be able to continue It’s a sad fact that waste minimisation and
disposing of waste to landfill at current levels. recycling are often regarded as ‘end-of-pipe’
The amount of waste put in landfill will have to solutions to industrial processes, whether
reduce by more than half by 2013, and to around manufacturing or service provision. Yet what
a quarter of the current level by 2020. This is a lies behind our work with the grocery retailers
huge challenge for the country and failure to and food and drink brand-owners is the same
comply could lead to fines being imposed on creativity that drives trends in technological
the UK by the EU running at half a million advancement; an advancement that creates
pounds per day. some of the adverse impacts that we generally
label ‘waste’.
Research carried out for WRAP indicates that
around half of household (domestic) waste arises At WRAP, we do not see waste minimisation as
from purchases made at supermarkets and a brake on creativity, far from it. As part of a
convenience stores. Around 16-18% of all rubbish greater drive towards resource efficiency, it is
put out by households is retail packaging. As a a discipline in the true meaning of the word –
result, WRAP started its work with the major a constraint that improves the breed, gives
grocery retailers during 2004, including the direction and stimulates innovation. Without
launch of a new Innovation Fund in November discipline, the energy of creativity is not
2004 – both aimed at reducing household channelled to social, environmental and economic
packaging and food waste at source to help benefits but allowed to waste itself in ways that
achieve those challenging national waste add little to the advancement of human society.
reduction targets.
This report is not an invitation for readers to
Allied to this is the universally acknowledged indulge in idle speculation about the future,
fact that the breadth and pace of change in the entertaining as that might be. Instead, this is
grocery retailing sector is accelerating and the an invitation for you to engage with us as we
drive for consumer convenience is omnipresent. attempt to find a path to innovation and design
Given this combination of factors, WRAP excellence in the still-blank face of tomorrow.
commissioned the IGD to carry out extensive
research into the impact of these trends and
others on the household waste stream.
5
Executive Summary
Despite the complexity of factors affecting the short to medium-term future of grocery retailing
in the UK, it is possible to establish a reasonably accurate scenario based on an extrapolation
and analysis of recent and current trends both in the sector and in consumer’s homes.
Overall, there is no one trend or potential area of development that is without the dual potential
to be positive or negative. The appropriate response to the analysis contained in this report is
for concerned stakeholders, such as WRAP, to identify the entire range of possible impacts of
a given retail or consumer trend on its objectives or on resource efficiency and household
waste minimisation more generally.
To achieve this further work is needed by WRAP to:
Monitor the early stages of trend development for further evidence and data
Analyse the potential negative and positive impacts in finer detail
Map the key decision-makers and stakeholders
Identify (or create) the most relevant forum for further discussion
Identify the optimum intervention points that avoid or minimise negative trends and encourage
and build upon positive trends
Influence development by engaging with the major players in the area of concern, and
Construct attractive initiatives that promote business and consumer-focused solutions.
Based on this approach, the major areas for consider are thus:
A mature and consolidating commercial market and a relatively stable national economic
performance (at least in the short to mid-term) point to further diversification into non-food
categories and a push for international growth for the larger retailers. The link between increases
in household disposable income and consumption is also a significant challenge in household
waste terms.
These same factors will continue to drive the popularity of Every Day Low Price strategies for
some segments of the market, focusing attention on cost of sales and supply chain efficiency.
For other segments the drive to service a growing premium food market will lead to the creation
of more product and service innovation.
Supply chains themselves may well become even more geographically extended, with larger
volumes of goods travelling further distances due to the pressures of globalisation, the need for
international expansion and the politics of intracontinental trading blocs. This will create a state
of dynamic tension for those retailers using their global buying power to source cheaper overseas
products to deliver the EDLP agenda at a time when an increasing number of consumers are
demanding locally sourced products.
For all these reasons, new product innovation will continue to come under pressure to return
investment quickly and will only be pursued in the light of a strong business case. Any promotion of
resource efficiency as part of the innovation process will thus only meet with retailer approval if
it is aligned with closely researched and fully articulated commercial objectives.
6
Executive Summary
Regulatory developments will need to be viewed in the round – not just those aimed at packaging
and environmental concerns specifically, but those relating to food safety, labelling and so on.
This wider remit for WRAP and other agencies to help food retailers respond to the spirit as well
as the letter of the law will enable ‘compliance plus’ strategies to be designed well in advance,
maximising the benefits without adversely affecting waste streams.
Socially and demographically speaking, there will continue to be a greater proportion in the
population of older people, as well as single person and single parent households – all of whom
will either have lost or never needed to gain cooking skills. Couple this with the breakdown of
the ‘three meals a day at the table’ model and the pressure for retailers to supply flexible meal
solutions that can be bought and consumed 24/7 and the result could mean a considerable
increase in household packaging and food waste.
Under these conditions, packaging has to perform at 100% across every aspect of its multi-functional
life cycle – as protector during transit, shelf-filler, advertising display, information provider, portion
controller, cooking receptacle, and culinary presentation item. Building resource efficiency into
such an item may prove challenging to designers but may offer a chance to rethink the entire
meal delivery experience.
New technology presents further opportunities, but also further threats. The closer to the horizon
of commercial realization the technology resides, the more difficult it is to influence its development
or use. For example:
In the short-term, researching the net impact of waste arising from on-line shopping is an
obvious opportunity for WRAP and it’s retail partners.
In the medium-term, the debate about food related biotechnology and genetic modification
(at least in Europe) appears to be over, but the effects of this marketplace decision has not
been investigated closely enough from a resource efficiency perspective.
Nanotechnology on the other hand, though something for the longer-term, has a quality of
potential ubiquity that demands informed debate by early and detailed enquiry.
All of the above Commercial, Political, Economic, Social and Technological factors (and many
more considered in this report) will have mixed effects. The negative effects are the ones that
attract the most attention as their impact will be felt in non-commercial areas - negative commercial
impacts are usually resolved quickly by the producer or by the marketplace. Successful players in
the grocery retail sector will be concerned therefore about such issues, grouping them together
under the banner of Corporate Social Responsibility (CSR). Further consolidation, with fewer,
larger retailers and brand owners presents an easier task for organisations such as WRAP to
leverage influence. For those retailers struggling to compete, however, CSR issues could be
seen as peripheral.
Ultimately, as with all the identified trends in this report, the more the market leaders integrate
and embed resource efficiency and waste minimisation as a core principle of their strategic business
decisions, the greater the overall beneficial impact of their work will be. The opportunities identified
here are merely doorways leading to the same goal.
7
Executive Summary
Introduction
This document summarises a larger report prepared by IGD on behalf of WRAP (the Waste & Resources
Action Programme). This work represents a wider research effort at WRAP to better understand the
retail sector and the impact of trends in the sector – and in consumer’s homes on the amount of
household food and packaging waste generated each year.
This summary report has been broken down into the following five sections for ease of reference:
The Competitive Environment
Political factors
Economic factors
Socio-demographic factors
Technological factors
8
The Competitive Environment
The retail grocery market
The major grocery retailers operate almost 5,900 stores in the UK ranging from hypermarkets
to convenience stores. This variety of formats helps meet different consumer needs at different
times in different locations. The UK grocery market is exhibiting all of the signs of maturity.
Growth rates (total market) are in long term decline, operators are finding it increasingly difficult
to deliver growth and there is fierce price competition, margin pressure and consolidation.
UK grocery market performance – long term view
Source: IGD Research, 2005 Note: Market prices shown at year end based on current prices. *Denotes IGD estimate
of market value for 2006.
Retail strategies
It is worth noting a few things about the grocery market during 2005. It was a pretty good year for
the UK grocery market with overall performance fair, with sales up 4.2% to £120 billion - but this
disguises increasing difficulties in some areas. Firstly, most of this growth was produced by just two
big players: Tesco and Asda. Many other companies experienced either static growth or a decline in
their market share. Secondly, background inflation (indicated by the Retail Prices Index excluding
Mortgage Interest Payments or RPI-X) across the year was 2.2%, so grocery market growth in real
terms was only 2.0% More importantly, many retailers grew at below the RPI rate, so were in effect
declining. Thirdly, growth in the supermarket sector was then (as now) increasingly derived from
non-food sales. According to IGD research, non-food category sales grew about four times faster
than food categories in supermarkets during 2005.
9
The Competitive Environment
In a mature market such as this, competition approaches a "zero sum" game. Manufacturers and
retailers can only grow by gaining share from competitors. Weaker participants are forced out.
Surviving companies are forced into maintaining a more aggressive posture. As an illustration of this,
the table below shows the market share for the UK retail grocery sector as at August 2006.
12 weeks to 12 weeks to
14 August 2005 13 August 2006
Tesco 30.3% 31.6%
Asda 16.6% 16.6%
Sainsbury’s 15.7% 16.0%
Morrisons 11.2% 11.0%
Somerfield 4.2% 4.4%
Kwik Save 1.7% 0.2%
Waitrose 3.6% 3.8%
Iceland 1.5% 1.5%
Netto 0.7% 0.7%
Lidl 2.0% 2.1%
Aldi 2.3% 2.5%
Other Multiples 1.6% 1.6%
Total Co-ops 4.7% 4.5%
Source: TNS 2005
This relentless battle for share has given rise to:
A stronger focus on price.
A drive for efficiencies.
A race for consolidation, both in supermarket and convenience retailing, and in food and
drink manufacturing.
A contest to secure share through on-line retailing.
A drive to diversity including into banking, non-food retailing and international expansion.
At the same time, such a market puts high demands on establishing and maintaining clear differentiation
between the players. So much so, that it’s worth looking more closely at the main strategies employed
by retailers in this area.
1 Differentiation through Price
Two distinct pricing strategies have emerged here: Every Day Low Price (EDLP) and High/Low pricing.
10The Competitive Environment
EDLP
‘Every Day Low Price’ has two separate ingredients: consistency and low pricing. The aim is to build
consumer trust and loyalty. Short term, deep-cut price promotions and multibuys are rarely offered.
Opportunities are consistently sought to scale back prices, either through economies of scale or finding
new efficiencies in the supply chain. Cost savings are routinely passed to consumers through price
reductions. As a result, consumer confidence grows as they make repeat visits.
Wal-Mart is the exemplar of this strategy and applies it through Asda in the UK. Tesco and Morrisons
apply a similar strategy but with more promotions than Asda. Although Waitrose operate with fairly
consistent prices, such pricing is not the main focus of their differentiation strategy, which focuses
instead on quality (see below) .
High/Low
A ‘High/low’ strategy means charging higher prices on most lines but alongside frequent and
eye-catching promotions (such as “buy one, get one free” (BOGOFs), money off and 3 for 2 offers).
This can generate excitement, drive high sales on promoted lines and bring extra people to the
store. However, shoppers can feel cheated if they discover that despite the promotions, their total
shopping basket is still expensive.
In recent years, EDLP has been a far more successful pricing strategy than high-low pricing. Tesco,
Asda, Morrison’s and Waitrose have been the only supermarket retailers to deliver strong sales
growth. The first three of these now account for almost 60% of the grocery market. The dilemma for
the others is how to compete. They have neither the scale nor the culture to switch to EDLP, as Iceland
has previously demonstrated.
2 Differentiation through Quality
Waitrose and Marks & Spencer have successfully differentiated on quality and Sainsbury's has also
done this through its “Taste the Difference” range. This is a strategy that is suited to larger retailers
who can run a wide variety of product lines. ‘Value’ ranges can thus sit alongside the higher quality
products throughout the store. As well as offering consumers greater choice, such Point of Sale
encouragement to ‘treat’ themselves on impulse actively increases the overall value of an individual
shopper’s basket.
3 Differentiation through Service
This is an approach taken by many small and specialist retailers. Perhaps the best international
example is Superquinn, an Irish family owned supermarket retailer. Superquinn management takes
an extremely active interest at store level. Each store has links with the local community, stocking
local produce and working with local producers, as well as offering a number of different service
counters.
Another fine UK example is set by Waitrose, whose staff are all shareholders (‘Partners’) in the John
Lewis Partnership and thus have a financial stake in the business as a result. However this kind of
outstanding service is often challenging to sustain throughout a large retail chain.
11The Competitive Environment
There are obviously other strategies to maintain growth in a mature market beyond differentiation,
some of which may be largely unseen by the buying public, but that still affect the continuing ability
of individual retailers to improve their overall performance and offering. Retailers have, for example,
sought to drive profits through diversification, not just in terms of increasing their non-food product
offering, or moving into financial services. Having reached a comfortable position in the home market,
many of the big players are turning to international growth to consolidate their home base as well
as extend their profit making capability.
Whatever the strategic direction chosen by the retailers, such intense competition has a big impact
on suppliers. It is extremely difficult, for example, for suppliers to pass on cost increases. Instead,
retailers expect them to balance these out by delivering increasingly efficient supply chains. This has
led to initiatives such as open book costing, factory gate pricing and co-managed inventories – all
approaches that can help by highlighting opportunities to drive further resource efficiency, thus lowering
costs, through the chain.
IGD research shows that major scope still exists to minimise costs in supply chains by reviewing them
from end to end and improving business processes. Up to 30% of costs in a product chain are
unnecessary and arise from quality control problems, forecasting errors, inefficient logistics, poor
layout, damage, excess handling, and theft among other factors Minimising most of these costs
requires teamwork, rather than tough negotiating.
At the same time, suppliers themselves are continually consolidating. As a result, manufacturing
facilities are increasingly migrating overseas and ranges are being rationalised to simplify marketing
and production. As an illustration of the latter, Unilever has recently contracted its global brand
portfolio from 1,600 to 400 products, a 75% reduction.
Despite the retail price squeeze that drives such pressure through the supply chain, it remains
important for suppliers to innovate. No matter what the market conditions, they still need to counter
the tendency for every product market to drift towards ‘commoditisation’; the tendency of products
of the same type to become more widely available, less expensive, less profitable and less distinctive
- but more capable - over time. The prevalence of EDLP retailing is, however, accelerating this process,
increasing the demands on suppliers.
The future and the market
City financial and business analysts have a clear vision of the future for grocery retailing – more of
the same! They believe that Tesco, Asda and Sainsbury’s are in such strong positions that most other
retailers (including non-food ones) will find it almost impossible to compete effectively.
Scenarios drawn from this view include:
Without competition and planning regulations, the retail market evolves towards a Tesco / Asda
or Tesco / Sainsbury duopoly.
With regulations restricting acquisitions and new sites, a proportion of the market will be filled
with ‘lame duck’ retailers in addition to the Big Two.
12The Competitive Environment
In either case, Tesco, Asda and Sainsbury’s will stretch the competition rules to their limit,
expanding into non-food retailing and other products and services.
These scenarios would be relatively unaffected by outside factors. For example, it is unlikely that
another international food retailer will enter the UK market, as the barriers to entry are relatively
high, and the possible return relatively low in such a mature market. However, the US company
Whole Foods are opening their first store in the UK in early 2007 with more to follow.
All this forecasting comes with a Health Warning - although the analysis is plausible markets rarely
evolve so predictably or so neatly. We should expect at least an element of the unexpected!
The future of UK grocery retail competition will rest largely upon these factors:
The speed at which Tesco attacks the non-food sector with specialist stores, catalogue and online
sales, and extended ranges. IGD considers many of the high street non-food retail chains to be
vulnerable to such an assault.
Whether Tesco falters. The danger lies in their runaway success. They will need to manage
consistently negative PR around their scale and influence. Ultimately, they could face a
consumer backlash.
The success of Morrisons in recovering now that the integration of Safeway is complete.
Morrisons stumbled initially but may succeed in the longer-term, emerging as a bigger force
than before the acquisition, even if smaller than originally anticipated.
The ability of Waitrose and Marks & Spencer to carve a much bigger niche market for quality.
IGD expects Waitrose to grow steadily and become a national player. We expect Marks &
Spencer to focus more on food as a differentiator from its clothing competitors. We also expect
new and existing small players (including independent food markets and local farm shops) to
prosper by competing on quality.
The ability of Sainsbury’s to reposition and differentiate itself. It is in a weak position to take on
Tesco and Asda at their own strategy; however, it has begun to invest more aggressively in
price and has recovered lost market share.
The ability of the limited line discount chains (Aldi, Lidl, Netto) to drive stronger growth through
better adaptation to UK conditions. This format is growing rapidly everywhere else in Europe
and creating strong deflationary pressure. IGD expects discount retailing to hold a continuing but
small section of the UK market.
The extent to which the big branded manufacturers help retailers to differentiate. These
manufacturers prefer to see a diverse retail market. Some, such as Procter & Gamble and Unilever
are now planning to support retail differentiation by providing dedicated products and services.
Whether struggling companies fall under new ownership as their share prices fall. This could be
a private owner (such as entrepreneur Philip Green), an overseas retailer or investment consortia.
It would result in a fresh injection of ideas but the same strategic challenges would remain.
13The Competitive Environment
Implications for packaging and food that households throw away
Deep cut promotions can be wasteful, encouraging people to buy products that they later discard.
EDLP is a less wasteful model as it offers consistently lower pricing over a range of products
rather than special offers that tempt customers to over buy food - and then waste it.
A consolidating market will have mixed effects. The successful players will be concerned about
criticism and alert to issues of Corporate Social Responsibility. Fewer players mean fewer points
of contact and an easier task for organisations such as WRAP to leverage their influence.
However, for those retailers struggling to compete, environmental issues could be seen as
peripheral. On a more positive note, some retailers may see it as a point of differentiation.
The continuing price squeeze and emphasis on supply chain efficiencies is an opportunity for
environmentalists to sell a ‘win-win-win’ proposition; resource efficiency = cost efficiency =
environmental impact minimisation.
Sales channels
Despite concerns that a few retailers are monopolising the market, consumers still enjoy extensive
choice. Admittedly, the number of specialists such as butchers and greengrocers has declined sharply.
Against this, diversity amongst sales outlets is supported by the fact that
The convenience channel is thriving,
Many products can be ordered direct over the Internet,
Farmers’ markets are growing in popularity,
Discounters have a steady share,
Specialists still survive in town centres and
Sandwich bars, fast food outlets and other caterers always provide an alternative to food retail.
In addition, even the major supermarkets themselves operate a diversifying range of formats. They
do this both to meet various shopping needs and to maximise their sales space within the planning
and competition regulations. Formats include:
Hypermarkets - huge stores of up to 100,000 sq. ft. with a mixture of food and non-food products
e.g. Asda Wal-Mart Supercentre and Tesco Extra.
Supermarkets and superstores - large to mid size stores with a wide food and more limited
non-food range e.g. Sainsbury's and Morrisons.
Compact supermarkets - increasingly focusing on fresh food with a more limited range of core
grocery e.g. Waitrose and Somerfield.
Convenience stores - always under 3,000 sq. ft. e.g. Tesco Metro.
Forecourt joint venture stores - in alliance with oil companies and offering a convenience
store range.
14The Competitive Environment
Marks & Spencer has also developed a slightly new type of store that incorporates elements of a
convenience style offering with a ’meal solution centre’. These “Simply Food” stores are situated in
mass transit areas such as railway stations, motorway service stations and town centres.
Many supermarket retailers also offer an Internet shopping service - the main exceptions are
Somerfield and Morrisons. Recent estimates from IGD suggest the grocery on-line market was worth
over £1.5bn in 2005. The Internet also gives direct access to consumers for producers. Now that
there is a critical mass of users and cost-covering delivery charges, Internet shopping is becoming
profitable and not just a development project for retailers. Tesco.com began to make a profit in
2001/02 and Sainsbury’s to You began to break even in 2003/04.
Retailers, however, are not the only ones to discover the advantages of the Internet. The NFU estimates
that farmers sold £325 million of farm produce over the Internet in 2003. In a related move, the
development of such direct selling by producers means that today the NFU estimates that there are
over 380 farmers markets in operation nationwide and that 60% of these markets are expanding. In
all, modern farmers markets are generating over £166 million for producers.
The future of sales channels
Driven by factors such as consumer demand, regulatory constraints and the competitive dynamic,
sales channels will continue to evolve. Key considerations will be:
Desire for a ‘retail experience’: Consumers will continue to demand that shopping is not only
functional but also fun. This will help drive the growth of very large stores and shopping centres: the
‘high street under one roof’. Customers will be induced to spend most of their day shopping for both
food and non-food offers and using the accompanying facilities, such as banking, dry cleaning,
pharmacy, childcare, beauty, healthcare, catering and entertainment. The free market would drive
the creation of many more ‘mega-malls’ but they are currently constrained by planning rules.
Increased demand for ‘meal solutions’: Time pressure, falling acquisition of kitchen skills, growing
disposable income and demand for instant gratification are fuelling the market for fresh, healthy,
exciting and easy to prepare meals at home. Specialist stores such as Marks & Spencer Simply Food
have been developed for this market. Supermarkets are evolving in this direction, replacing grocery
staples with new fresh food ranges. The best locations for ‘meal solution centres’ are those suited to
visits on the way home from work, e.g. town centres, commercial business parks, motorway services
and train stations. Shopping on a daily basis for fresh meal solutions will become routine for many,
particularly single people and pre or post family couples.
Advancing technology: As Internet access becomes increasingly routine, fast and mobile, consumers
will purchase a growing amount online. Store based retailing will continue to provide the opportunity
to browse, smell and touch food, as well as offer the opportunity for smaller value trips that would
not justify the delivery charge. However, in the very long term, even these attractions may fade.
Online, or even mobile SMS, shopping could become the norm rather than the exception when
allied to the ‘smart kitchen’ (see section below on Home Technology) physical “bricks and mortar”
stores will still be in demand for impulse purchases and immediate needs, but they will look quite
different from the stores of today.
15The Competitive Environment
Desire to ‘reconnect with food’: The mainstream food market is focused on low prices, consistency
and visual perfection of produce. This is consumer driven and highly popular. However a proportion of
people (the ‘foodies’) are less content with this mass production approach. They are more concerned
with quality, authenticity, provenance, seasonality and affinity with small scale and local producers.
They are reinforced by food columnists and commentators, celebrity chefs and food magazines and
prepared to pay a premium. Hence the popularity of farmers’ markets, specialist delicatessens and the
success of Waitrose. Growing incomes will encourage the growth of specific retail formats to meet
these needs.
Polarised market: Despite the growth in the number of affluent foodies, there will remain a very
price focused segment for which every penny counts. As such, discount retailing is a secure format.
Continuing demand for local shopping: Hectic and chaotic lifestyles will always fuel demand for
convenient, local stores. These will adapt to local needs, offering whatever products and services are
most in demand.
Implications for packaging and food that households throw away
The development of ‘meal solution centres’ will encourage regular and frequent purchasing of
short shelf life food. The impact on waste will be complex:
Ready to assemble meal ‘kits’ require robust packaging to prevent spoilage and maintain
freshness.
Packaging will be per meal, rather than per ingredient.
Buying a complete meal, just for the day ahead, should reduce over-purchasing and food waste.
The growth of online shopping could have various waste reduction benefits:
Deliveries in re-usable crates rather than carrier bags. This should also reduce damage
andencourage packaging minimisation.
Less impulse (and therefore excess) buying, although websites will become sophisticated
at encouraging this.
Less emphasis on the pack as an ‘attention grabber’ and therefore simpler, more functional
packaging.
Discount retailers take a ‘no frills’ approach to packaging, as in all other aspects. This minimises
excess packaging but discourages the uptake of new materials with reduced environmental impact if
they are more expensive.
Farmers’ (and other) markets tend to sell food loose or with minimal packaging. However,
sometimes shoppers buy more than they need on impulse.
Researching the net impact on waste of online shopping is an obvious next step. This might
then develop into recommendations on best practice. Internet retailers could be encouraged
to supply products in re-useable crates and packaging. They could also further publicise the
favourable price differential in purchasing loose fruit and vegetables and encourage the use of
generic, minimised packaging for delivered items.
16The Competitive Environment
International / global retailing
In food retailing terms, there are a limited number of truly global retailers. IGD’s Global Retail Index
identifies a retail company’s global strength according to a number of ‘hard’ and ‘soft’ factors, such as;
Turnover,
Number of countries in which present and
Dominance of home market.
This index identifies only three food retailers large enough to be considered global: Carrefour, Wal-Mart
and Tesco, although a further 8 are termed ’leading international’ retailers. The UK stock market
supports and rewards retailers with global strategies and many City analysts believe that ultimately,
national retailers will find it almost impossible to compete against global players.
For the ‘retail super league’, the first phase of globalisation occurred during the 1970’s through cross
border expansion into neighbouring countries. The second phase followed much later in the 1990’s
and took the form of expansion into non-neighbour states (‘internationalisation’) Now, only a handful
of retailers are in a position to envisage ‘true globalisation’.
In a retail environment characterised by strong levels of competition, market maturity and price
deflation in many product categories, retailers are increasingly focused on the benefits of scale. Most
economies of scale are locally or nationally based on factors such as size of store, logistics network and
negotiated volume discounts for products.
It follows that international expansion provides further opportunities for scale economies, e.g. in
head office expertise, systems development and most especially global deals negotiated with suppliers.
Most of these economies are theoretical rather than proven at this stage, but international retailers
are working in this direction.
As retailers expand into more countries, they grow to appreciate the benefits from sharing best
practice across their international operations.
Tesco tends to enter new markets via a small start-up acquisition or joint ventures with indigenous
retailers. This gives Tesco local understanding of the supply chain, consumer preferences and shopping
patterns as well as an established supplier base. It brings expertise from the UK to these markets but
in return, brings many elements of best practice back to the UK. One example is its e-training system
for shop staff, which was first used in Korea.
The future for global retailing
The pace of globalisation will quicken as developing economies such as India and China seek to
exploit their opportunities to supply the West. This will mean further investment by global
retailers as they seek to benefit from emerging consumer markets, as well as sourcing more
extensively from these lower cost areas, especially for non-food.
17The Competitive Environment
Whilst many global retailers will continue expanding, there will also be a period of retrenchment as
companies come under pressure to address their under-performing assets in overseas markets
and focus on their domestic or core businesses. This process of depressed profitability, capital
rationalisation and consolidation is likely to occur in many markets in the coming years, such as
Poland, South Korea, Argentina, the Czech Republic, Mexico and Taiwan. It will lead to survival of
the fittest. Some hint of this was seen in October 2005 as Tesco and Carrefour announced an
asset swap deal covering the Far East and Central Europe.
Successful retailers will be those able to extract international economies of scale. However, it
will also be increasingly important for them to be sensitive to local needs, to adapt their ranges
and services and to avoid local hostility to their scale and power.
Implications for packaging and food that households throw away
Product procurement and forecasting will be done on larger volumes and be transported for
longer distances. This could lead to greater volumes of obsolete stock – as it will be more difficult
to predict demand accurately on such a scale. As a result, there could be more ‘dumping’ of
stock at knockdown prices (known as ‘distress selling’) encouraging excess buying and the need
for landfill. (This applies in the main to non-food categories, although it is not out of the question
that packaged grocery and other foods with simple storage requirements and long shelf life may
be subject to the same phenomenon).
18Political Factors
Regulation
General regulation
UK legislation and attendant regulations taking effect within the last two years alone have impacted
on many different aspects of the grocery industry. Examples include:
The prohibition of consumer-facing advertising, marketing and promotions for tobacco products.
Substantial increases in the statutory entitlement to maternity pay and maternity leave, affecting
retail businesses that rely largely on female staff.
Substantial increases in the National Minimum Wage which, in October 2005, increased from
£4.85 to £5.05 per hour for workers over 21 and from £4.10 to £4.25 per hour for others.
The requirement under the Disability Discrimination Act to take reasonable steps to make businesses
accessible to disabled people, with implications for foodservice outlets, retail stores, websites, etc.
Planning law
UK legal restrictions on the development of retail outlets have increasingly limited expansion in
recent years. In the 1980's, retailers benefited from a relatively unconstrained planning regime. In
the mid 1990's however, there was a major shift of direction, implemented through changes to the
Planning Policy Guidance and, more recently, Planning Policy Statements (PPGs and PPS’s ), intended
to limit out-of-town development and revitalise town centres. The shift prompted a re-alignment
in the development strategy of major grocery retailers towards the convenience channel and on-line
retailing.
In the UK, planning decisions are made by local government but based upon guidelines issued centrally,
thus promoting consistent, rational outcomes. There are currently 25 PPGs and PPSs but the ones
most applicable to grocery retailing are:
PPS6 “Planning for Town Centres” (TSO 2005) – The statement’s aim is to focus retail
development on existing sites and town centres wherever possible to ensure the vitality of town
centres whilst preserving consumer choice and access. However, PPS6 is somewhat more flexible
than PPG6, which it replaces.
PPG13 “Transport” (TSO 2001) – Here the aim is to limit the burden on the transport
infrastructure by reducing the number and length of private journeys, especially by car.
The impact has been to slow the rate of new, out of town developments. However, from a
competition perspective the policy has been criticised for preserving the status quo. For instance
Asda is eager to introduce more Wal-Mart style hypermarkets to the UK but is frustrated by the limited
availability of sites under current planning guidance.
The future and planning regulation
A relaxation of planning legislation would favour the development of out of town stores, but
there is nothing to indicate that such a relaxation is likely.
19Political Factors
If the current regime is maintained, saturation of the market will quickly occur in the grocery
sector. Under these circumstances, the major beneficiaries would be non-food operators, such as
Ikea. Asda Wal-Mart is the grocery retailer most likely to take advantage of such a situation by
opening new non-food only stores.
Competition law
The grocery market in the UK is displaying signs of maturity. With the volume demand for groceries
almost static, the most reliable means of achieving growth is through consolidation. The alternative
strategy, organic growth, is considered too slow to deliver decisive advantage. However, consolidation is
strictly regulated by the Competition Commission in order to protect the interests of consumers.
The supermarket sector was last investigated in detail by the Competition Commission (CC) in 1999.
Reporting its findings in 2000, the CC concluded that the market was "broadly competitive", although
it did express some concerns over local competition and certain practices in dealing with suppliers,
which could restrict competition in the supply markets. A further investigation has been instigated
during 2006.
In considering local competition, the 2000 report introduced the concept of ‘isochrone analysis’ as a
means of measuring local choice for shoppers. An isochrone is a line which joins together all of the
points that can be reached within a constant journey time from a given starting point. Mapping and
analysing them helps to determine the number of competing stores in any defined district. Their use
means that the local implications of any retail mergers are now considered, as well as the national
market share.
For example, Morrisons was only able to acquire Safeway on the condition that it disposed of a
number of specific stores that had been specifically identified using isochrones . Overall, the
Safeway judgement also demonstrated the determination of the competition authorities to retain at
least four major competing supermarket chains. Thus they ruled out an acquisition of Safeway by
Sainsbury’s or Asda on the grounds that this would leave only three powerful players.
Competition policy will constrain further major acquisitions in grocery retailing, even though market
forces would otherwise drive more of it.
Smaller mergers or acquisitions are not impossible, but they are scrutinised in detail at a local level
by the authorities. Acquisitions in the convenience channel do still provide a less regulated method
of expansion in the UK grocery market, though this is becoming increasingly controversial as the
major supermarkets extend their influence in convenience through acquisition of specialist businesses.
The future and competition regulation
Competition laws will continue to regulate the activities of UK retailers strictly. This may even in
time extend to the consideration of the whole market (i.e. activities in both the convenience
and supermarket channels).
Competition laws for suppliers may become more relaxed as markets are viewed in a European
context, rather than a local context (reflecting the reality of international competition).
20Political Factors
The authorities will insist upon retaining at least four large supermarket operators in the UK and
this will restrict mergers amongst the leading players (forcing retailers to look to either international
or product portfolio expansion in order to achieve growth). Smaller operators will continue to
consolidate and some of the leading supermarket chains are likely to acquire non-food retailers
to provide more sales space and/or range extensions.
The rules defining ‘one-stop’ and ‘top-up’ shopping as separate markets are attracting criticism
from many quarters and may be overturned. However, by that stage, most of the attractive
convenience chains will probably already have been acquired by the supermarket chains. Note
that, even so most convenience stores are fairly small and therefore the supermarket share that
may be achieved through acquisition is restricted.
Since consolidation is the most obvious response to the forces of maturity in the marketplace,
competition restrictions will leave retailers in a quandary - the need for underperforming players
to find alternative strategies will become more urgent.
The Office of Fair Trading (OFT) has reviewed its Code of Practice for regulating relationships
between retailers and suppliers, imposed in the wake of its 2000 investigation; despite extensive
criticism of the system by suppliers, it was not able to elicit any formal complaints from suppliers.
However, the current (2006) Competition Comission investigation is revisiting this territory.
Food safety, nutrition and labelling
Various entities have responsibility for the safety of food. The recently established (following Bovine
Spongiform Encephalopathy [BSE]) UK Food Standards Agency has the lead on regulations, whereas
Local Authority Trading Standards Officers are mainly responsible for enforcement. The European
Food Safety Authority is a new venture and fulfils a risk assessment, rather than regulatory, role.
In addition to food safety, the Food Standards Agency is also responsible for food labelling jointly
with the Department of Health for nutrition. Government is taking an increasing role in offering
dietary advice, with the aim of reducing the social cost of obesity (estimated by the House of
Commons Health Committee at £7.2bn per year and rising).
In recent years government has become increasingly critical of the food industry, which it sees as
being partially to blame for public health issues as a result of current product formulations and
marketing activities. It has repeatedly threatened to legislate in order to place tighter restrictions on
businesses and the food industry has responded through extensive reformulation and policy change.
IGD has been in the forefront of this move through its role in the development of improved nutritional
information for processed foods.
Each of the regulatory organisations takes a close interest in food packaging as a way to protect
products from contamination, a method of providing traceability and as the main vehicle for product
information.
Food labelling is a subject of great debate with all parties recognising that the status quo is confusing
to shoppers. Shoppers’ concerns include:
Logo proliferation.
21Political Factors
Marketing claims – e.g. what is a ‘natural’ product or a ‘healthy alternative’.
Clarity – with so much information can people find what they need quickly and easily?
Availability of information for people with special dietary concerns, e.g. allergens.
Country of origin – what rules should apply to products manufactured in one country but with
ingredients from another?
Lack of consistent recycling information on retail packaging.
In terms of logo proliferation, a vast number of different logos and standard marks now exist,
denoting a variety of different credentials. Examples include the British Farm Standard, RSPCA
Freedom Food mark, GI Index, Vegetarian Society and the Soil Association Organic mark.
Implications for packaging and food that households throw away
Extensive labelling requirements can result in the need for extra packaging on small items.
If the full set of labelling rules were to be extended to unpacked items (as is mooted in some
quarters) then this might encourage more pre-packing, because any complexity is easier to
manage in the chain than in the store.
Waste-related legislation
Waste management is the subject of a range of directives, regulations, strategies and aspirations,
originating both from Europe and from within the UK. Most significantly, the EU Landfill Directive
requires the UK to reduce its use of landfill for waste disposal by 2020. The Directive also sets out
successive targets for reducing biodegradable municipal waste (BMW) sent to landfill. BMW to landfill
must be reduced to 75% of the 1995 baseline by 2010, 50% by 2013 and 35% by 2020. The Directive
also requires Member States to set up a national strategy for the implementation of these targets;
and the UK government has tasked local authorities to reduce this waste by 30% by 2010.
Currently, perhaps the other most important regulation affecting waste management is the Packaging
Waste Regulations, which came into force in 1997, pursuant to the UK’s obligations under the EU
Directive on Packaging and Packaging Waste.
The object is to recover 60% of the estimated 8 million tonnes of packaging waste produced in the
UK by 2008 and the regulations cover all businesses falling into one of the following groups:
22Political Factors
Manufacturers of raw materials used for packaging
Converters of raw materials into packaging
Packers or fillers of packaging
Sellers of packaging or packaged products to the final user or consumer
Any other business owning or handling more than 50 tonnes of packaging per year
These criteria include almost all businesses involved in the manufacture, transport, wholesale or
retail of groceries, although there is an exemption for businesses with a turnover of less than £2m
per year.
Each stage in the grocery chain is responsible for recycling a certain percentage, by weight, of the
packaging used (raw material manufacturers 6%, converters 9%, packers 37% and retailers 48%).
The scheme has been criticised by industry for its complexity and for its administrative burden.
Nonetheless, it does seem to have had a major beneficial impact on the environment. For example,
in 2002 around 4.8m tonnes of packaging waste were recovered (source: The Environment Agency).
One key reason is that the regulations place a monetary value on items previously regarded as
waste, providing a real financial incentive.
In the grocery industry, the introduction of the Packaging Waste Regulations coincided with the
development of backhauling disciplines by suppliers and retailers, in which vehicles that would
otherwise have made empty return journeys are more usefully employed. Such use includes ferrying
recyclable material and waste to collection points. The exact cost benefits of this remain undisclosed,
however, many retailers view this as a key opportunity for driving efficiency in the supply chain.
There are a series of other regulations in the UK that affect the way that retailers and suppliers are
obliged to view their operations when it comes to waste minimisation. They include:
1 Essential Packaging Requirements – the key requirement is that no person responsible for packing
or filling products into packaging or importing packed or filled packaging into the United Kingdom may
place that packaging on the market unless that packaging fulfils the Essential Requirements:
Packaging volume and weight must be the minimum amount to maintain necessary levels of
safety, hygiene and acceptance for both the packed product and the consumer.
Packaging must be recoverable in accordance with specific requirements (either through material
recycling, incineration with energy recovery, composting or biodegradation).
Noxious or hazardous substances in packaging must be minimised in emissions, ash or leachate
from incineration or landfill.
Trading Standards Officers have the power to assess the compliance of any packaging by requesting
technical documentation on both the Essential Requirements and the Heavy Metal limits. The
documentation must be produced within 28 days of the request being made.
2 Landfill Tax – the UK Government is already committed to increasing the standard rate of landfill
tax. Subject to consultation, the Government has announced that it will increase the landfill tax
escalator to £3 per tonne in 2005-06, and by at least £3 per tonne in future years on the way to a
23Political Factors
medium- to long-term rate of £35 per tonne. At the time of writing this report, the current level of
tax is £27 per metric tonne per year. The Government’s intention is that increases will be introduced
in a way that is revenue-neutral to business as a whole.
3 Waste Electrical and Electronic Equipment (WEEE) Directive – this EU Directive applies to all
electrical and electronic equipment, including household appliances, computers, power tools, medical
devices, toys, lighting audiovisual equipment and similar items. It aims to reduce the waste arising
from such equipment and improve the environmental performance across the life cycle of
electrical/electronic products. A number of key targets are contained within the Directive, compelling
those responsible for an Item’s manufacture to assume responsibility for its disposal by financing
the treatment, recovery and disposal of the products.
The Restriction of Hazardous Substances (RoHS) in Electrical and Electronic Equipment
Directive – this sets new targets for the future prohibition or reduction of certain hazardous substances
in equipment production, such as mercury, lead and cadmium.
Special and Hazardous Waste Regulations 2005 – the recently revised version of these regulations
sees the inclusion of a number of new waste streams that were not previously designated as hazardous,
such as end of life vehicles.
Animal By-Products Regulations 2005 – these tightened the pre-existing regulations regarding
the processing, use, disposal and trade of animal by-products following the widespread Foot and
Mouth outbreak in the UK in 2001.
The future and waste-related legislation
Waste management regulations will continue to tighten, with higher recycling and composting
targets forcing industry to re-evaluate its procedures and pay extra attention to this challenge.
For example, many current waste management requirements (such as packaging recovery notes)
are seen as a business overhead, rather than as an element of an individual product cost.
Future waste management regulations may therefore prompt operators to evaluate waste
management processes more closely. Additional regulations will come into force, for example,
requiring all future electrical goods to be designed with energy use and other environmental
concerns paramount.
Implications for packaging and food that households throw away
Packaging waste regulations currently tend to be viewed by operators as a business overhead,
rather than a product-related cost. If this attitude can be changed, more focus may be brought
to bear on reducing excess packaging.
Any additional regulations designed to reduce packaging waste are more likely to be positively
received by industry if:
They are at the lowest possible level to achieve the stated goal,
They replace, rather than supplement existing regulation,
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