Supermarkets at the sharp end of changing consumer behaviour

Steve Smith, head of thought leadership at SMV Group, says mixed retail results highlight the need for supermarkets to carefully navigate the emerging multi-channel retail world…

Christmas results from the supermarkets are in and one of the most striking pieces of news is that Tesco was hit by a fall in its non-food sales. As a consequence, Tesco has announced it shall reduce the number of new store openings this year.

This retreat could spell trouble for the nation’s largest retailer – and others if they follow suit. CBRE data shows that food retail space under construction or with consent soared 16% to over 25 million sq ft at the end of 2011, possibly leaving supermarkets with no immediate return on their investments and empty shop floor space. (Incidentally, the downturn in non-food sales by supermarkets makes news about Morrison’s being in talks to acquire stores formerly occupied by Best Buy in order to sell its Kiddicare products surprising.)

Tesco’s plans are matched by some well known high street retailers. Together, Dixons, Argos, Game Store, Mothercare and Thorntons plan to close nearly 1,000 stores over the next two to three years, once property leases expire.

Of course, one reason for poor retail results and store closures is the economic malaise. But to blame job losses, stagnant pay and an uncertain economic future for this obscures the more fundamental underlying shift of people moving more of their non-food purchases online. According to Columino, nearly 11% of all UK retail sales will happen online this year – up nearly 300% on 2005. And Forrester forecasts that by 2014, 37 million UK online buyers will spend £56 billion online.

A major task for supermarkets and major high street retailers over the next few years is how to manage this changing consumer behaviour and the increasing share that the online market will take. Rather than treat online and physical stores as separate channels, retail owners will need to carefully strategise about how they use them together. For in the minds and in the behaviour of many consumers, there is little distinction between them. Close too few stores and revenues are likely to decline, but closing too many stores could have the unintended effect of impacting online sales.

This is because physical retail spaces are important for creating and communicating brand experiences for shoppers and therefore brand equity. For shoppers, physical stores will continue to be important for browsing, trying out new products, and interacting with staff. And experiences from these will help generate trust in these brands’ online stores.

This new eco-system of retail environments is especially good news for supermarkets that respond to it. On the one hand, food sales in physical stores will continue to be profitable, even if Britain’s internet grocery market is forecast to double to £9.9 billion by 2015, according to IGD. On the other, supermarkets should leverage brand trust and value generated through physical stores in order to encourage online behaviour such as browsing and purchase of both non-food and food items. This means that although Tesco is right to cease opening out of town hypermarkets (which will be glad reading for Mary Portas), supermarkets should be careful not to reduce their physical non-food retail too much, as doing so would be likely to impact trust, equity, product awareness and online purchase.

M-commerce will be a significant opportunity for supermarkets in the multi-channel world, facilitated by and declining smartphone prices and growing tablet ownership. Supermarkets are able to employ these to integrate multiple channels and indirectly boost sales by enabling shoppers to access and browse products easily (even in-store, as Tesco is already doing), research products, check prices, find special offers, user virtual supermarkets, scan products, order online and have the choice of collecting in-store or delivery at home.

Further opportunities are around loyalty programmes, extra rewards, NFC, virtual coupons, social media integration and group discount offers. Vital to this is that although most of the supermarkets provide mobile apps across the spectrum of operating systems, supermarkets must continually optimise their sites for mobile, partly because many first time mobile supermarket users are likely to visit the site rather than use an app – and also to give customers choice.