Last year was a challenging one for businesses across the UK, as economic volatility and the political uncertainty created by Brexit took a gradual toll. This is was felt particularly harshly in the retail sector, which endured a harrowing fourth quarter that resulted in job losses, declining revenues and dwindling profit margins. This should not come as a major surprise, especially with many traditional retail brands struggling to survive in an age of digitisation and rampant e-commerce.
In terms of numbers, an estimated 84,000 jobs were slashed across the retail sector between October and November, which translates into a sharp quarterly decrease of 3%. The continued uncertainty surrounding Brexit played a pivotal role in this decline, as it made retailers more inclined to adopt a risk-averse approach to spending while also forcing many to increase their costs. After all, the vote to leave you has sent the value of pound spiralling, increasing the cost of imports and compelling brands to share these additional expenses with consumers.
Supermarkets Managed to Buck This Trend, While Discount Chains Are on the Rise
There were some retail giants who managed to buck this trend, however, with the leading supermarkets providing a relevant case in point. Cumulatively, these outlets recorded their best festive performance for four years, with Neilsen’s retail data confirming that revenues for the four-week period ending on December 31st were up 3.3% year-on-year. This was the highest level of growth since 2012, while it also represented a huge important on the flat rate of expansion recorded at the end of 2015.
In terms of individual chain performance, the data revealed that Morrison’s enjoyed largest annual growth of the so-called ‘Big Four’ (which also includes Tesco, Asda and Sainsburys). The relative newcomer achieved year-on-year growth of 3.4% in 2016, while showcasing a noticeable spike in revenues over the festive period. Tesco also recorded respectable growth figures of 2.7%, with the UK’s former market leader coming in slightly ahead of its established rivals.
While these four major brands all performed exceptionally well given the prevailing economic climate, however, it was discount chains Aldi and Lidl who really took the market by storm over Christmas. In fact, Aldi recorded the best growth of any leading supermarket chain in the UK, with sales having increased by a staggering 17% in the four-week period during December. The brand also gained nearly one million new customers as opposed to 2015, which will drive further and more sustained growth in the future.
Lidl also saw its revenues soar by 10% during the same period, highlighting the incredible impact that discounted supermarket chains have had in a changeable and unstable marketplace.
How Have Supermarkets to Thrive While Other Retailers Have Failed?
In some respects, supermarkets benefited from a number of favourable conditions towards the end of 201. It has also been suggested that the festive growth figures were slightly skewed by abnormal consumer behaviour, as the majority of consumers left their Christmas shopping to a later date and spent more in December than they would normally do. The week up until Christmas Eve saw sales increase by 22% year-on-year, for example, with cumulative revenues for the final two weeks of December totalling a huge £5.9 billion.
There were several factors that influenced consumer’s buying habits this Christmas, with one of the most impactful being the presence of an additional shopping day. Not only this, but the relatively mild weather and sustained absence of snow also negated the need for households to shop early and stock up on produce, which delivered huge financial benefits to the major chains.
While these factors may have helped to inflate the festive revenue figures recorded by supermarkets, however, the major chains must also take credit for the way that they have reacted to a volatile economy and changing, consumer outlook. All of the major players decided to simplify their sales and promotional strategies during Christmas, for example, present more straightforward discounts that actively increased seasonal spending.
As if to reaffirm this, the percentage of festive purchases committed to promotional products fell to 27% this year, which was the lowest rate for six years and indicative of a 4% decline from 2015 figures.
Most importantly of all, however, the UK’s leading supermarkets have done a superb job of communicating price amendments and accounting for the declining value of the pound. When ETX Capital reported that the currencies value had plummeted to its lowest level for 31 years, for example, many believed that retail prices would need to increase in order to cope with the additional cost of imports. While this has been true in most retail sectors, however, supermarkets have managed of negate potential price increases while communicating clearly and openly with their customers.
So even though some prices may have increased marginally, brands have been quick to educate and inform shoppers. They have also adopted a proactive approach and sought to offset these increases by reducing prices elsewhere, particularly on local produce that has been sourced from the UK. Discount brand Lidl have also capitalised on the fact that the company is German-owned, enabling it manage import costs without passing these directly onto the consumer.
Given that the cost of goods in Lidl and fellow discount chain Aldi is already exceptionally low, this means that these brands have so far been able to avoid the social and financial implications of Brexit.
The Last Word
Even accounting for the proactivity of major supermarkets and the natural advantages of internationally-owned discount chains such as Lidl, the growth recorded by these brands at the end of 2016 remained disproportionate to the economic climate. The question that remains is whether these figures can be sustained, particularly once Britain formally triggers Article 50 and leaves the EU.
The negotiations are expected to begin in March, and this will provide a stern test to the recent growth recorded by supermarkets. This is certainly a space to watch, however, particularly as the cost of imports will begin to eat away at supermarket’s profits for as long as the pound remains weak.
