Head of Insight & Loyalty
Marks & Spencer
Andrew Mann has experience as a director driving commercial success within FTSE 100 organisations. For 15 years he has led retail insight & CRM teams for Tesco, Asda, Coop, Sainsbury’s & recently Marks & Spencer. Andrew set up NorthBailey in 2019 to use his experience & network to solve strategic marketing problems for his clients.
Section 1: Consumer Behaviour Changes in your Industry
1.1. What have been the biggest changes in consumer behavior observed in your industry
1.1.1. Shift in Food Consumption
In March 2020, the biggest change we saw was a shift of 25% in what we call ‘out of home calories;’ where people were going out to restaurants, eating at work; literally moved overnight into the grocery marketplace.
This led to a 30% increase in demand overnight. Retailers & grocers, had to react and change their supply chains very quickly, at the same time they had very little government advice about what was going to happen and how they should be running their stores from a consumer perspective and from a colleague perspective and from a community perspective.
1.1.2. Increasing Trust in Retailers
Grocery retailers reacted to Covid-19 by rapidly putting in place measures that protected customers, colleagues and support for local communities. Customers reacted by giving a lot of support for the changes made.
Grocery retailers got a lot of consumer and colleague support as consumers felt reasonably safe going into a store, but also, they felt that they trusted retailers because they were also giving a lot back to the community because of the support for health workers, charities, key workers, food donations and other community initiatives. One of the biggest trends is that people trust grocery supermarkets more than they’ve ever done before.
1.1.3. Larger Baskets
I think the other key trend was an increase in larger baskets. People did less shops and did less shopping around and that trend has reversed out in as much in the last year that people are now starting to go back to smaller baskets and more shopping around, but it’s taking time to unravel.
I think the biggest trend that we’ve seen is the big increase in digital adoption, both by the retailers and by consumers in store and out of store in terms of digital changes to how suppliers delivered.
1.1.4. Panic Buying
The reality is panic buying was a very small change in behavior on an individual customer level and very little about hoarding behavior; buying more than you need. There were only 10-20,000 people who actually hoarded stuff.
They went out and bought bundles of toilet roll and pasta and other essentials. According to Kantar panel data, very few people across the country actually hoarded. What was prevalent was people would do their normal shopping, but did it more frequently. People tend to buy toilet roll every two or three weeks, and they’ll buy a big pack of it, but not everybody buys it in the same week.
What happened was those people buying toilet roll once every two to three weeks, bought toilet roll all at once in the same week and that created the illusion that demand increased significantly, and it created our supply problems in those areas. It was a small change in lots of consumers behavior that created what appeared to be panicked buying, but it wasn’t really panic buying because nobody was really panicking. They were just doing what they did normally, rather they all did it at the same time, the same week.
1.1.5. Working From Home
People were at home and doing more gardening or doing more DIY and were using digital tools to buy things, either delivered straight to the home or delivered or click and collect. In clothing, the big beneficiaries were retailers that had a delivery network set up. You can actually see digital adoption coming into its own. And the limiting factor was the amount of delivery networks that you had.
Additionally, some markets actually grew. The pet market has gone up by 10% and it’s never gone up by 10%. The number of pets in the country has significantly risen and therefore the pet retailers and specific pet retailers have had a huge bump.
1.2. Which consumer behavior changes will endure after the pandemic?
1.2.1. Digital Adoption
The biggest emerging trend we’ve seen is a big increase in digital adoption, both by retailers and by consumers in store and out of store in terms of digital changes to how suppliers delivered.
Effectively, there’s been 10 years’ worth of change in 10 months, in terms of digital adoption. If you look at grocery home shopping, the percentage or share of grocery home shopping, has effectively stepped changed in 10 years and has stepped up to where the projection was going to be, it moved 10 years in 10 months. And that is something that will stay because it actually suits customers.
It is easy and it is something that customers find rewarding. Retailers responded by providing the extra capacity needed to do delivery very, very quickly. Ocado had an expandable network, but they were restricted by the amount of space that they have in their central warehouses. They reached that capacity quite quickly and found it harder to find more capacity. Tesco, Sainsbury’s, ASDA who are the three largest grocery retailers and online shops, were able to utilize their big store space more effectively.
So, you can scale a grocery business more quickly if you don’t have to find the extra space as you would have in a big central warehouse, for example. You can take your big stores and actually have more people picking up orders. Digital adoption in terms of grocery home shopping is one thing that is definitely here to stay.
I think also digital adoption in a supermarket. Using digital tools to do your shopping; scan and shop, click and collect are all capabilities that have been successful over the pandemic and will continue to be used by customers in-store because it makes shopping easier.
1.2.2. Premiumization & Budget Conscientiousness
I think the one thing that I think we’re going to see is as we move on from the pandemic, everyone’s talking about growth in the marketplace. I think we’re actually going to see what a K shaped recession, where there have been people who have been in employment all the way through, haven’t been able to spend their money and therefore have got lots of liquidity availability and are going to start spending that.
I think there’s also those people who are who weren’t employed during a recession, are worried about losing their jobs, may lose their jobs and be in the wrong skill set and location to pick up a new job. And so, they’re going to be worried about money. You’re going to have a recession where retailers are going to have to react to people who’ve got money, so trading up, premiumization of products, but at the same time, customers who are very worried about their money and don’t have enough money. This group of people will be very price sensitive. So, you’re going to have differences at the top and the bottom of the market, this means what retailers offer to the market will be different.
1.3. How has the pandemic changed consumer interaction within your industry?
Retailers that have a loyalty scheme are able to communicate directly with customers, they have benefited because they’ve been able to communicate directly with customers, but also communicate in a relevant and targeted way. During the pandemic we have learnt people value relevant communication, but value it even more. I think the first thing is you’re going to see an increase in the amount of relevant, targeted communication that goes out directly to its customers. I think the second area is building the idea of trust. During the pandemic, customers wanted retailers to do the right thing for them, but they also almost equally wanted them to do the right thing for their colleagues and community.
I think you’re going to continue to see the way that retailers support their colleagues and the way that they support their local community is going to become even more important moving forward. A localness came into it and how you treat your colleagues going to be just as important as how you do the right thing for customers. Brands like Co-op that have got really good community messaging, so those retailers who treat colleagues and partners well, such as Waitrose or Morrisons have done a very good job of it. As a reward, they are receiving a lot credibility for it. Those retailers that don’t have a good reputation of looking after their colleagues haven’t performed as well.
1.4. What macro-economic/public policy measures impacted consumer in your industry most? How did this impact consumer behavior?
I think there are quite a lot of Brexit implications in the grocery industry that are going to impact customers. So actually, just importing and exporting food from the EU has created hiccups. And you can specifically see it when you look at what’s happening in Northern Ireland, with all the border checks for food production that goes from Great Britain into Northern Ireland. I think Brexit and border controls will have impacted what’s happening. I think the loss of some labor in terms of people will impact what’s happening and potentially in certain other parts of the country, make it harder to recruit colleagues into certain roles. And I think the other implication around Brexit will be how the agriculture is seen in the UK as well.
Fresh food is going to be critically important, but also, I think we’ve just announced the Welsh lamb that is fed with specific food has now been deemed a protected area. So again, that changes and how the whole agricultural policy for the UK as it comes down to the EU is going to develop, will change quite a lot around how customers see their food moving forward. I think Brexit is going to be the defining policy and what comes out of Brexit will be quite important for grocery retailing.
1.5. Have consumer product demands in your industry shifted?
I think what we’ve seen is the biggest change happened, where consumers were cooking more food at home, over a 100% increase in the number of meals eaten at home. Rather than eating lunch out or eating meals out in the evening and picking up breakfast on the way to work, consumers now buy 21 meals a week at home, rather than 10 meals a week at home.
There’s been a long-term trend around healthier food. There’s been a long-term trend around provenance of food. There’s been a long-term trend around convenience and making ‘easier food.’ So, this includes snacking food, but at the same time, there’s also a trend for lower food prices. You’ve got people who want better food for less money, and they’ve always done that, and most retailers have been able to deliver it.
I think the challenge is going to be how they can deliver it moving forward with the challenge around profit margins that are coming up and some of the challenges in ownership moving forward.
Consumers always demand sustainability, but they’re not prepared to pay for it. Legislation is the best way forward. The reusable bags campaign or recycling of single use bags, there was a lot of work done over 5 or 10 years to get it down to about two thirds of previous levels. When the government legislated against it, it dropped 95% in 12 weeks. There’s going to be a combination of sustainability as something that consumers will only do if they don’t pay for it or if they’re forced to do it.
Section 2: Company Responses to Behavioural Changes
2.1. What are the new measures that have been put in place to respond to behavioral changes?
I think the biggest change the retailers are thinking about it is how do you use digital capabilities to improve what the customers want, and customers want delivery. Not just delivery in terms of normal big grocery shop delivery, they’re also looking for convenience delivery as well. You’ve got new startups, like Gorillas and other organizations which are small, nimble, and can do delivery within the next 15 minutes effectively.
At the same time, you’ve got the big grocery retailers who are looking to develop their own version of that. Tesco has this in trial and are rolling it out, Sainsbury’s been doing it, Co-op are doing it with Deliveroo. Actually, what you’ve got is you’ve got the grocery business who have got a big delivery market, but are also trying to respond to this sort of faster, quicker approach. Then you’ve got more nimble startups, which are delivering it very well. I think that’s one of the big challenges – how do you deliver more convenience into a convenience market?
2.1.1. Profit Margins
During COVID the two discounters, Aldi and Lidl, didn’t perform as strongly as they have done in the last 10 years. Consumers went to larger stores and they went to stores that were closer to them and particularly older people were worried about going into a smaller discount stores. In the last three months discounters bounced back strongly. And they’ve bounced back with very aggressive pricing positioning, and people like Tesco and Sainsbury’s are responding very aggressively with price match programs to match discount store prices.
That’s putting a lot of pressure on their P&Ls, I think, they’re going to be looking to cut costs in other ways to respond. They’re almost determined not to allow discounters to get too much air space.
They’re making sure they match top lines in Aldi and Lidl. They’ll be looking at basket pricing as well as individual line pricing as well. They’re communicating that to customers. That will be one of the biggest challenges around how do you match the price of Aldi and Lidl when you don’t have their business model? Aldi and Lidl business model is lower prices, but also lower costs.
Tesco and Sainsbury’s, ASDA and Morrisons are all going to have to respond with fewer people in their stores and taking out their costs in terms of their property and running costs in stores. That’s going to be one of the big challenges to overcome they’re already talking to their suppliers about reducing costs, but they will be also looking to take out other costs as well.
2.2. What are the future opportunities to deal with behavioral change?
I think one of the biggest areas that retailers are going to be looking for is they’re being squeezed in terms of commodity areas because they have to match them against Aldi and Lidl. There will be innovation in those areas that will add value to customers and increase their profit margins on other lines.
We can expect expansion in terms of categories that have got higher value margins, like ready meals, added value brands and added value products in other categories. But also, if you look at what ASDA are doing, for example, they’re looking to take their retail space and tie it into more added value lines. ASDA they’re talking about having nail bars and they bought Leon, as a restaurant, so that they’re basically taking their retail space and adding more added value space into it. So, looking at almost where are you making pounds, how much you making on a pounds per square foot. And if it doesn’t reach a certain threshold, you’ll add in other categories that can enable you to do that.
2.3. What are the key emerging technologies in your industry?
I think the big change that happened this year is Amazon launching in the UK with their new technology around just walk out technology. They’ve got three stores now in the UK, they opened the first one in Ealing, then one in Wembley and then another one in the city of London. That technology is very innovative. They’ve been piloting in US, five or six stores in the US but opening three very rapidly in the UK is a way of demonstrating that they can scale it in Europe.
The technology is interesting in as much that other retailers have got pilots for it. I think Tesco have got a pilot that they’re rolling out. M&S and Sainsbury’s are all trialing the same sort of thing. I suppose the question for me is, is whether this technology, how much it costs to invest in it, versus the difference of the benefit that you get from a customer’s perspective from doing something like scanning on your phone, for example. Is it worth it?
It might take them 10 or 20 years to do that, but Amazon are developing this as a type of technology that they can sell to other retailers. If you could sell this technology rather than have to develop it yourself as a retailer, if you could buy this technology, if the economics work, it might be worth buying it. Amazon could make a lot of money selling this in the same way they sell AWS.
2.3.1. Big Data
The other big change in the last year is data and the quality of data. And what you’re seeing is those organizations that have got better customer data or a better product data and have an ability to use that data more effectively are winning.
I think in grocery, the likes of Sainsbury’s and Tesco who have invested ahead of the market in terms of the quality of their data. For example, they were quickly able to identify customers who were vulnerable and could offer home delivery service in the pandemic. They’re also able to, if you understand the customers better, you can provide better information to them around digital capability.
But also, if you have better product data, and you understand the provenance of your product, you can then talk about the sustainability of it more effectively as well. So, it’s a combination of customer data and product data, and particularly with what’s happening around sustainability demands and product availability, that will also help you in terms of your affordability through the supply chain. So actually, better data in the supply chain could add 1 or 2% margin to your business, if you understand where your product is in this whole supply chain. And 1 or 2% extra margin on a business that’s got a net profitability of 3% is pretty powerful.