As ever, the industry faces challenges in 2016; the National Living Wage and potential relaxing of Sunday trading rules will put further pressure on retailers already tackling food deflation and competition. However, by embracing trends such as food to go and fresh, as well as new technology, retailers can thrive. Here, leading industry figures outline their expectations for 2016.
Legislative challenges ahead
James Lowman, chief executive, Association of Convenience Stores
“As we look ahead to 2016, one of the biggest issues that the convenience sector will have to deal with is the introduction of the Chancellor’s living wage, set initially at £7.20. The announcement of the living wage marks a new precedent of politicians bypassing the independent Low Pay Commission and setting wage rates for political reasons rather than as a result of balanced consideration of the economics involved.
“We have made it clear to government that the introduction of the living wage will cost jobs in the convenience sector. Our research shows that when employment costs go up for retailers, the first things they do are reduce the number of staff hours in their business, cancel or delay investment plans and look at restructuring their staff pay structures. Ultimately, many will be forced to lay off staff altogether, and we are absolutely clear that if the Chancellor’s plans are implemented it will result in some store closures.
“Another issue that will be high on the agenda for 2016 will be the long-awaited review of business rates. While the Chancellor confirmed that there will be an extension of Small Business Rate Relief for another year, government is stopping the retail rates discount of £1,500 which has been such a help to many struggling high street businesses. In addition to this, there will be new uncertainty on business rates as government looks to devolve rate-setting powers to local authorities, allowing them to discount rates (and increase them to fund infrastructure projects) at a local level. In 2016 we will be campaigning for the £1,500 discount to be reinstated, along with detailed information about the overall review of the rating system and assurances that local retailers won’t be left worse off as a result of devolved powers.
“There are definitely positives for the sector in 2016, however. Our research shows that the convenience sector invests an average of about £150m per quarter as store owners look to improve their businesses, and predictions for the convenience sector suggest continued growth until at least 2020. Stores are constantly adapting their product and service offerings to meet the changing needs of consumers, with innovative formats appearing across the UK. 2016 will bring with it tough decisions for the convenience sector, but we will be working hard to ensure that government is fully aware of the consequences of their policies and will continue to call for measures to help local shops, not hinder them.”
Tap into the valuable top-up shopper
Jill Livesey, managing director, HIM Research & Consulting
“Speaking to retailers and suppliers over the past few months we get a sense that many will be glad to see the end of 2015; we feel positive that 2016 will bring acceleration of profit and volume. “It may not feel like it, but we have a little more money in our pockets and purses, with wage inflation finally overtaking the cost of living. More cheaper prices and promos will fuel consumer confidence, food price deflation is likely to continue, as will volume of products promoted in supermarkets at circa 40%, with a shift towards price reductions and less multibuys.
“Lower cost of fuel also impacts where to shop. We have seen a shift towards out-of-town shopping away from high streets, which will continue if we experience another wet summer, but UEFA football in June is a great opportunity to create activity and noise to attract shoppers back locally. “It may feel gloomy, but convenience remains the key shopper macro trend, driven by longer working hours, shrinking house sizes (which equals smaller kitchens and less storage space), meaning that we remain a nation of top-up shoppers. The growth of single households and an ageing population all support the need to shop locally, little and often.
“Understanding shopper demographics needs more focus. While convenience stores’ appeal with young mums and the over-55s is essential, to protect and grow we must do more to attract the young, free and single shopper as well as child-free couples. Convenience stores often under-index in these shoppers.
“It is not surprising that the online food channel excels with these groups. Our research reveals that nearly 47% of food online shoppers are aged under 35, and the online shopper will be a top-up shopper. Do we believe customer service, product offer and communications, the whole experience, is relevant to these younger shopper types? We don’t see this discussed enough in our industry and it has to be addressed now.
“One way to satisfy this younger group is by offering coffee to go. About one in four convenience stores now offers hot coffee in store and 64% of coffee to go shoppers are under 45. This investment in store needs to be considered. Finally, customer service will be more critical than ever in winning footfall and loyalty. Shoppers continue to rate convenience stores ahead of other formats every time for excelling in great customer experience and service. Ease of shop, friendly and helpful staff remain the most important needs and expectations of shoppers and why they choose to visit their local convenience store. This has to be taken into account and cannot be sacrificed when making staffing decisions with the impact of minimum wage legislation next year.”
A changing market creates opportunities
Mike Greene, managing director, My Local
“This year was the 30th anniversary of Back to the Future and it reminded me that not much has changed in the industry in some ways. At the time I was working on Spar’s 8 till Late project and we used to say that it was like ‘dancing with elephants’ in that you move quickly or you’re dead. Nowadays that means getting fresher, better at food to go, faster and friendlier.
“Convenience stores are at the heart of communities now, they are the last bastion of community. As such, there is more opportunity than ever to be a part of it. The growth of online and discounters is also an opportunity because it doesn’t encroach on convenience – it just puts more pressure on the supermarkets. Convenience suits people’s increasingly busy lifestyles. “In terms of challenges, potential Sunday trading changes will be an obstacle and likely to kill jobs in the independent sector. The National Living Wage will also be a challenge, but retailers need to accept that they need to pay it. Again, it goes back to focusing on food to go and fresh, where the margins are better and enable you to pay more.
“But retailers also need to make employment more attractive and help convince people that university isn’t the only option. The growth of apprenticeships is a real opportunity which store owners can take advantage of. I believe that the majority of people are better suited to on-the-job learning. The great thing about retail is that you can start with no academic qualifications and end up at the top. In 30 years I’d like to see some of our managers at My Local as industry leaders. We just need to get over this paranoia about going to university.”
Expect to see consolidation in the industry
Nick Read, chief executive, Nisa
“The outlook for 2016 remains challenging as price deflation and the intensity of the competition from the discounters continues to put pressure on the market, which will be heightened further as Amazon Fresh enters the sector. This will undoubtedly result in us seeing more consolidation in the convenience sector and perhaps result in one of the big four finding themselves in a period of uncertainty.
“There are several regulations that will potentially have an impact on the industry in the next year, including Sunday trading, the living wage and an increase in business rates. This pressure will certainly result in an increase in automation in stores with fewer people working within the sector. It will require retailers to truly understand and embrace their unique selling point to ensure they are competitive.
“Meanwhile, the importance of having a strong chilled or food to go offer will continue to grow. Further to this, as we see customers’ disposable income decrease we are likely to see an increase in smaller, but more frequent, shopping trips. With the increase in emphasis on chilled and food to go, these higher margin categories provide greater opportunity for retailers to develop their range and increase footfall and with the increase in popularity we are certain to see innovation in this market.
“Consumers are now seeing the convenience sector as a destination shop rather than just for top-up, therefore retailers can utilise this opportunity by developing their point of difference and enhancing their offer to capture these sales.”
Adapt to trends to stay on top of the competition
Daniel Quest, retail director for Costcutter Supermarkets Group
“The grocery sector has undergone major change and 2016 will see continued challenge from the discounters and online, especially with Amazon and Google entering the grocery delivery market. Despite this, independent retailers can continue to grow, however they must adapt and review their offer. More than ever retailers must ensure they offer a first-class store and service and this includes having the right partner for their business with expert support to drive footfall.
“The government’s healthy foods and lifestyle agenda, and its focus on taxing high-sugar products, is getting louder and should be seen as an opportunity as well as a challenge. With the demand for fresh in convenience continuing to grow, retailers should capitalise on this. They should also review the categories that are in the government’s sights to try to reduce their dependence on them and protect their income. The demand for fresh will continue to grow. Not every store demands a supermarket-sized fresh offer, though, and it’s about knowing the market and giving customers what they want, when they want it.
“The role technology plays in the independent sector will increase significantly, both to create greater efficiencies within store operations and also as a way to drive greater customer engagement and footfall. As in previous years there will be further consolidation in order that retailers can compete with the advance of the discounters and the multiples.
“Retailers who continue to adapt their stores have reason to be positive. With rising demand for fresh and food to go it is crucial that these are executed well in store. Retailers can’t underestimate the importance of getting the basics right: delivering the right range at the right price, integrated with a high-quality own brand. Where independent retailers can really win is through giving exceptional customer service and having a truly local offer that meets local demand, something the multiples and discounters cannot achieve.”
Convenience is the sector to be in for 2016
Debbie Robinson, managing director, Spar UK
“The grocery retail landscape in the UK is constantly changing, and 2016 will be no exception. As retail changes then more than ever convenience is where we need to be. The UK economic recovery is ongoing, while established multiples are in decline. However, the overall forecast looking ahead to 2020 is positive, and the UK is set to remain Europe’s largest grocery market.
“According to the IGD, the ‘hot three’ channels that will drive growth in the UK are convenience, discount and online shopping, while the superstores and hypermarkets look set to lose volumes. Growth for symbol groups, though, will continue.
“Also part of the current scene is the political landscape, with changing legislation on the living wage, Sunday trading and business rates all important factors to take into account. The social structure of the UK is constantly changing, too, with more single-person households than ever before, while great taste, health and low price are all key for shoppers’ decision-making.
“What’s more, developments in technology mean we also need to be adapting with the latest innovations, such as Apple Pay, contactless payment and even, in the future maybe, delivery drones! Looking ahead to next year, Spar is in a great position, with all our wholesalers in profit. Our many Spar independent retail businesses are showing steady growth, strong sales and are sound business models. In particular, we are seeing growth from fuel, food, new stores and new accounts. Events, too, are a fantastic place to bring in more sales, with many exciting activities taking place over the coming year, such as Euro 2016, Rio 2016, Christmas and going into 2017 we will be celebrating Spar UK’s 60th birthday!
“To make sure we are on target with our plan, we continue to track our shareholders’ strategy and monitor its progress. We have a roadmap of meetings which have taken place throughout the UK in 2015. All working groups, national teams and the Guild Board have been involved in shaping the strategy to ensure it is modern and relevant, and this will continue into 2016 and 2017.”
Challenges and rewards in the year ahead
Kash Khera, managing director, Simply Fresh
“With discounters established as a staple of the food retail landscape and the big four losing ground, 2016 will be an interesting year for independent retail. We have seen Tesco experimenting with smaller and smaller formats, and Aldi trialling 6,000sq ft sites. Shopper habits have also changed, with little and often the norm with millennial shoppers. This provides both opportunity and challenges to the independent retailer.
“We have to give a value perception, but this is not always translated as price value. We can offer services that complement our offer such as dry-cleaning, parcel collection, order deliveries, food cooked in-store. This creates a local hub for the community.
“We have to make our offer the most convenient for the shopper. Fresh and prepared meals become more relevant to this time-poor consumer, as do healthy options and more wellness/dietary products as they are more conscious about what they eat.
“The blurring of food service within convenience is also becoming more prevalent. This gives a great opportunity to create a point of difference with an all-day hot food offer. Breakfast is also becoming an opportunity to generate additional sales.
“Healthy snacking is becoming more prevalent. Consumers are missing out on lunch and having two or three smaller snacks on the go. As these are transient purchases the convenience sector can capitalise on this.
“Symbol groups are making more use of technology, such as social media, to promote stores and products, and media screens which display POS and informative material. Making best use of CPO and epos data is a must for convenience retail in order to help maximise sales. As consumer habits change retail has to be quick to react. 2016 will be a challenging, but rewarding time for the right retailers.”
Innovate to make sure you stand out
Colin McLean, chief operating officer, Scotmid Co-operative
“It probably is more a case of what’s not in store for 2016? A year of challenges – old and new – a year of opportunities, new initiatives and, where you have the opportunity, a year of differentiation from your competitors.
“Convenience retailing will remain a tough and challenging market in Scotland. Customers are still challenged financially and this will help discounters make further inroads. However, product development, new product ranges and targeted solutions for customer shopping missions will help drive growth.
“The National Living Wage (NLW) in April means that an acceleration of efficiency and continuous improvement measures will be required to mitigate the impact on profitability. Therefore the Society will continue to innovate, with a clear focus on delivering long-term sustainable effectiveness in everything we do.
“Other challenges will demand that retailers continue to strive to develop a lower operating cost model while improving the customer offer. Sometimes the two don’t go hand in hand, but in the competitive market in which we operate it will be essential to make sure both these areas are delivered.
“Differentiation will continue to be key. Food to go will continue to evolve, as will local sourcing. Additionally, new developments in targeted loyalty programmes will be a major influence in 2016. While the year ahead will be filled with challenges it will also offer opportunities. Major sporting events from European Football Championships (minus Scotland!) through to the Olympics will help stimulate sales. And, of course, one of these years we are going to have several months of a glorious summer! We can but hope!”
The future looks bright for independents
Kate Mills, owner, Heath Stores, Horsmonden, Kent
“The outlook in 2016 remains positive. The trend for shoppers to do more mini shops as opposed to one large shop is likely to continue and we should ensure that we engage with our customers regularly so they know what we offer and why they should be using us.
“The main challenges in 2016 will be plain packaging in tobacco and the living wage. Retailers will need a robust system in place to cope with plain packaging. Our tobacco is now kept in drawers under the till so customers cannot see our range at the moment anyway.
“Wage increases are also not a significant issue for us as we are already paying at the level set for April 2016. However, as we see further above-inflation increases through to 2020 we will need to cut costs and/or increase prices to reflect the additional wage costs. We have already begun reviewing our banking and card machine costs and have been able to identify significant savings.
“The trend of certain suppliers not paying a sustainable commission or wholesale price (PayPoint and Menzies spring to mind) will continue to challenge us. The justification given that these products encourage footfall is debatable. As an industry we need to continue to work together to challenge these large companies who are making excessive profits at the expense of the small business.
“The time-poor nature of our society will continue to influence the industry and as such we need to ensure that we offer a solution: convenience; good service; and good range including food to go, meals for now and fresh. The trend for increasing spend in the convenience sector is encouraging and in 2016 we should ensure that we do everything we can to encourage customers into our shops with personal service, excellent products and maybe something just a little different that keeps them coming back.”