Discounters And Online To Be Fastest-Growing Grocery Channels Over Next Five Years

 Namnews, 14th June 2022

IGD has released its annual channel forecasts for the UK grocery market which highlight the impact of inflation on the sector and the continued loss in share for traditional supermarkets and hypermarkets.

The insight provider forecasts that the UK grocery market will grow by 11.3% – from £216.8bn to £241.3bn – between 2022 and 2027. While inflation will underpin the majority of growth in 2022, with a 3.5% value increase predicted, this is expected to moderate from 2023 onwards.

With the war in Ukraine impacting the UK supply chain and food prices expected to increase by 8.9% in 2022, IGD anticipates that shoppers will respond to the spike in general inflation by making real terms cuts in food expenditure.

“Our new forecast sees growth for all retail channels. Though discount will naturally benefit from shoppers’ desire to save money, growth will be held in check by increasing competitiveness from other channels,” said Caroline Myers, Director of Retail Analysis at IGD.

“The outlook has changed most for larger stores, where we expect more competitive pricing and the development of more inspirational store formats to achieve growth, while convenience is well-placed to build on the growth achieved during the pandemic. After largely holding on to sale gains from Covid, service investments and the rollout of rapid delivery will boost the online channel further.”

She added: “Many shoppers on tight budgets will adopt a more for less mentality – managing their spend closely by trading down to cheaper ranges and pack sizes, switching brands for private label and seeking out the best promotions. Shopping will also be more planned, with many switching to more overtly value-focused retailers.

“Retailers’ sales will however be supported by shoppers eating out less often, building demand for at-home entertaining and premium meal solutions.”

IGD forecasts that discount will be the fastest-growing channel (+23.9%) over the next five years, driven by a combination of households looking to save money, the likes of Aldi and Lidl continuing to expand their store networks, and variety discounters such as B&M and Home Bargains sharpening their grocery offer.

However, channel growth is expected to be held in check by a more competitive offer at multiples and by the increasing risk of sales cannibalisation in catchments where they are already well represented.

Maxime Delacour, a Senior Retail Analyst and specialist in the discounter channel at IGD, commented: “Physical expansion will remain key to growth for discounters, with both Aldi and Lidl looking to maintain their ambitious opening targets for 2025. However, with the possibility of the retailers missing these targets and openings likely to slow following this date, forecast growth is also slowing.

“Although like-for-like growth has been a challenge for the discounters, they are well placed with the cost-of-living crisis to appeal to shoppers’ increasing savvy behaviour. Attracting new shoppers will be key, with Lidl in a strong position here to use its Lidl Plus app to encourage loyalty.”

After a slight decline in 2021 against a surge in shopper numbers and order sizes during the height of the pandemic, online is expected to rebuild momentum and outpace discount from 2025. Growth over the five years (+22.6%) is likely to pick up as new order capacity is developed, and rapid delivery services expanded. However, with operators facing increasing cost pressures, delivering profits is likely to be prioritised over sales growth, particularly in the short term.

Simon Mayhew, Head of Online Retail Insight at IGD, said: “Increasing competition will ensure that bricks and clicks retailers continually invest in their online businesses. Quick commerce pure plays and bricks and clicks retailers will continue to expand their rapid delivery operations, enabling online to cater for a broader range of shopping missions, such as food for now and top-up shops. This will attract new shoppers to the channel and increase how frequently they shop.”

Following a 2021 impacted by tough comparatives, 2022 is expected to see a return to more buoyant growth for the convenience channel as shopping behaviour normalises and events provide a boost. Thereafter, IGD believes the channel will continue to modestly outperform the market (+13.0%), sustained by ongoing investment from retailers in new and improved stores bringing enhanced capability to the channel.

“2022 will be boosted by a number of big event opportunities – including the Platinum Jubilee in early June and the football World Cup in November,” said Patrick Mitchell-Fox, Senior Business Analyst at IGD and convenience channel expert.

“A hoped-for good summer would create additional opportunities, helping cement the recovery of city centres and travel, both domestic and in-bound tourism. However, it is clear that inflation will be an important factor in driving value sales during the year.”

Meanwhile, supermarkets are set for modestly positive growth over the forecast period (+6.2%), meaning they will outperform hypermarkets but see their market share decline slightly.

Assisted by inflation, large stores will also grow sales modestly (+5.2%). However, without the benefit of new space and strengthening competition from other channels, the market share of hypermarkets is expected to continue declining.

Nick Gladding, Senior Retail Analyst at IGD, commented: “A much-improved value position and effective loyalty schemes will allow operators to defend their market share much better than in the 2008 downturn. But operators need to ensure a focus on efficiencies does not compromise shoppers’ experience and that they continue to offer breadth of range to differentiate from discounters.”

Channel values (£bn)

	2022	2023	2024	2025	2026	2027	% change	£bn change
Hypermarkets	16.6	16.9	17.0	17.2	17.3	17.5	+5.2	+0.9
Supermarkets	91.1	92.6	93.4	94.6	95.6	96.8	+6.2	+5.7
Convenience	45.1	46.3	47.4	48.6	49.7	50.9	+13.0	+5.9
Discount	29.7	31.2	32.6	34.1	35.5	36.8	+23.9	+7.1
Online	22.0	22.7	23.7	24.8	25.8	26.9	+22.6	+5.0
Other	12.4	12.5	12.4	12.5	12.4	12.4	+0.3	0.0
TOTAL	216.8	222.1	226.5	231.7	236.4	241.3	+11.3	+24.5

Notes: Channels may not exactly sum to market total because of numerical rounding in this table. ‘Discount’ includes all sales of Aldi, Lidl, and grocery-only sales of the principal variety discounters. ‘Other retailers’ includes specialist food and drink retailers, CTNs, and the food sales of mainly non-food retailers and street markets.

NAM Implications:

• Hopefully, suppliers have factored in this inevitability…
• …and are now busy using the rest of these forecasts to bench test their other strategies?