Tesco's 'annus horribilis' might be over but market polarization is here to stay

Supermarkets: Christmas trading results reveal ongoing changes in the market
Supermarkets: Christmas trading results reveal ongoing changes in the market

Tesco will be pleased 2014 is over, but this week's results expose broader structural changes in the market that aren't going away, argues Andy Nairn, founder of Lucky Generals.

As ever, the first week of January is spent poring over masses of data to understand which retailers have fared best over the festive period - and why.

But as usual, the numbers ultimately boil down to a simple truth that has been familiar to all retailers since the dawn of time: the stores that served their customers best, prospered - while those that took their eyes off the ball struggled.

Most obviously, Tesco had other things on its mind and problems that stretched way beyond one trading period. Today it reported ‘better than expected’ results as sales decline slowed – but it was a sales decline nonetheless. However in its wider struggles, Tesco probably wasn’t too disappointed - just glad its ‘Annus Horribilis’ was over. 

Clearly, some massive remedial action beckons in 2015 – spanning everything from international divestments to selling off non-core UK assets.  If the new management team can achieve this major restructuring exercise while refocusing on the customer, it might just get over these results.  Let’s see.

All's to play for in 2015 – especially if Tesco awakens from its nightmare

At the other end of the spectrum, everything that Lidl touched turned to gold.  This is a brand that is on a roll: opening stores, upping its communications spend, offering great prices but boosting its quality credentials at the same time.  The marketing team should be applauded for getting every touchpoint of the customer journey right: for, as they cheekily reminded us, in one of their many fine ads "Every Lidl helps."

The contrasting fortunes of Tesco and Lidl mark a broader trend, of course: the continued polarization of the market.  

The premium players (principally Waitrose but also M&S, at least as far as food is concerned) have done well, along with the discounters, while the rest (including Cheshunt’s finest) have been caught in the middle ground.  

And while No Man’s Land provided the setting for the season’s most memorable TV commercial, in the real world, it proved a very dangerous place to be.

The other clear dynamic is the increasing dominance of price as the main market lever (at the expense of margins, which are now slimmer than ever).  

Upping the ante

Even the high-end brands have had to up their promotional ante and watch profits suffer as a result.   With food and fuel deflation, plus cut-throat competition (the Big 4 have all launched significant price initiatives in recent days), this is not going to change any time soon. 

Another marked trend is the continued rise of small store formats.  Look closer at Sainsbury’s data, for instance, and you’ll see that while the retailer’s total sales fell by 0.4%, its convenience store sales rose by 16%.  The much-heralded "space race" (over the last decade, the big grocers have invested more than £35bn in new space, with very little to show for it) is now over.

Watch out for the main players trying to sell off their bigger stores in 2015 and a continued shift to smaller sizes. 

Finally, the results emphasise the ongoing importance of a seamless multi-channel experience.  Both Sainsbury’s and Asda fell victim to online glitches in the crucial last few days of pre-Christmas trading.  Meanwhile, Waitrose (which was historically somewhat hamstrung by its relationship with Ocado) finally got it together with a barnstorming 26.3% increase in Waitrose.com sales.

So all to play for in 2015 – especially if the giants of Tesco finally awaken from their nightmare, as this will create ripple effects all round.  And in the meantime, we can only dream of a time when the pendulum swings back to brand-building and stronger margins.

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