UK Grocery Market: More Competitive Than Ever

While the Competition Commission prepares to release preliminary findings from its grocery market investigation, Verdict Consulting research shows that the supermarket sector is one of the most competitive segments of UK retailing. Indeed, the outlook for the next five years sees a strengthening of competitive dynamics as retailers increasingly battle to secure their share of consumer spend.

Analysis shows that when it comes to grocery shoppers, no one chain has an exclusive hold over customers. All of the big four supermarket players (Tesco, Sainsbury, Asda and Morrisons) share well over eight out of 10 of their regular customers with other food stores; none manage to persuade anywhere near a majority of their shoppers to buy from them alone.

Significantly, despite the growth of the main grocery players over the past five years, customer sharing numbers remain virtually unchanged, showing that customer choice has not been diluted and that people are still able to shop around. Of particular note is Tesco, which despite being the leading UK grocery retailer, shares more or less as many of its regular shoppers as other players in the market.

The evidence that consumers actively exercise their choice over where to shop is backed up by data which shows that, compared to most other retail sectors, shoppers for food and groceries use more stores to meet their requirements. The average food consumer makes regular use of three stores; in the majority of retail sectors the average number of stores regularly used is just two.

According to Verdict, far from suffering from a lack of competition, the grocery sector and the players within it face an increasingly hard battle to win over customers. There is a common belief that because food retail has a number of very large, dominant players, consumer choice is somehow stifled. In truth, it isn’t the biggest battle grocery retailers face is how to hold onto increasingly fickle customers who are able to transfer their custom elsewhere. Verdict’s data shows that six out of 10 food shoppers make regular use of a food retailer other than the big four supermarkets.

Verdict believes that this battle for consumers will intensify over the next five years for three main reasons.

Firstly, the competitive dynamics of the market are changing. Old models which assess competition on a local basis looking at how many physical stores people in a certain area have access to are no longer relevant. Increasingly mobile shoppers are able to use stores while traveling, say while going to and from work. Moreover, the continued expansion of internet shopping is giving shoppers access to food retailers which may be inconvenient for them to reach by conventional means.

Secondly, compared to five years ago, all four of the multiple supermarkets are strategically stronger and will increasingly fight each other for market share. Back then, Sainsbury and Morrisons were both much weaker than they are today. Both were focused on sorting out internal issues rather than on actively growing their market share. That has now changed; both retailers are fully focused on trying to attract new customers and that, ultimately, means a much more competitive environment.

Thirdly, the growing interest in ethical and environmentally sound produce and food provenance will help fuel the growth of alternative players such as farmers markets and food box delivery schemes. While individually small, collectively these players do increase choice and represent a growing threat to established players.

As a result of the increasingly competitive nature of the market, Verdict sees no evidence that any one player could dominate the grocery market over the medium term future.

People seem to be increasingly worried that Tesco, as the leading player, could attain a monopoly position in the market, but the hard facts behind that contention just don’t stack up. Tesco may have the largest market share but they certainly don’t have a monopoly on customers and there is virtually nothing they can do to compel people to shop with them.

Verdict’s data shows that over the past 10 years Tesco has increased its share of the food and grocery market by 9.9 percentage points. Even if that performance was to be repeated over the next 10 years it would still only leave Tesco with a 35% market share, far from a monopoly position.

What must be avoided, at all costs, is big grocery retailers being victimized for their ability. The major grocers are not big because they have some mystical power over the market; they are big because they excel at what they do. From the analysis, it is very clear that they will need to keep excelling if they are to maintain their leading positions.