So far, 2014 has been a difficult year for supermarkets. Turnovers are volatile, with a poor Q1 and a fair Q2.
Price erosion: a structural problem
Our expectation is that turnover growth will stall relative to last year. However, the principal problem facing supermarkets is not the economic crisis, ABN AMRO believes, but rather finds its cause in the price war that began back in 2003. Prices in Dutch supermarkets fell sharply, particularly in 2004 and 2005, and supermarkets were forced to take severe measures to improve their efficiency, in order to keep pace with the changing prices. Although prices began to climb once more after 2005, the price war continues to this day. Customers had become used to paying less for their food, and since then supermarkets have been operating with minimal margins and keeping a watchful eye on each other’s prices.
Consumer prices in supermarkets determined by global market prices
For the past ten years prices have risen only piecemeal, often by less than the inflation rate. The result is that supermarket prices are effectively determined by global market prices, with a delay of approximately six months. When the global market prices rise, the margin is often too small for supermarkets to compensate for the change, and they pass it on to their customers. When the global market prices fall, the competition on prices forces supermarkets to pass on the difference directly to the customers. Separate and distinctive pricing policies that allow for shocks to be absorbed and margins to be strengthened are no longer possible. Customers are now confronted directly with fluctuations on the global market. ABN AMRO expects this situation to continue for the coming years.
No immunity to the economic crisis
The economic crisis that began in 2008 coincided with periods of major price increases on the global market. A side effect was that turnovers remained at the same level even as sales volumes diminished. This made it appear as if supermarkets were immune to the crisis. On the underlying level, however, their sales were in fact under pressure. For example, the growth rate for sales volumes was zero in 2011, followed by a slight increase below the long-term average in 2012 and by a 1.1 percent fall in sales volumes in 2013 – only a 3.2 percent price increase ensured that turnovers continued to move upward. So far, prices appear to be stabilising in 2014. Over the past four months for which reports are available (May to August), prices have shown no further increase. This is the longest period since 2010 in which prices have not risen. As a consequence the turnover data are, for the first time, showing visible evidence of the disappointing movements in sales volumes.
Customers profiting from high pressure from promotions
In recent years, the constant focus on customers' perception of prices has forced full-service supermarkets to become more and more similar. Although supply remains very diverse it is becoming increasingly uniform. Investments in quality or distinctive product ranges have been put off or cancelled, out of concerns for perhaps being thought too expensive. In the meantime discounters, with their firmly established price image, have in fact invested in quality. As a consequence, their proposition has become an ever more attractive alternative to the traditional full-service supermarkets. In response, and considering the disappointing sales volumes, ABN AMRO believes that it is very likely that full-service supermarkets will continue to look to the familiar solution of special offers. However, this will do nothing for their margins. Although the pressure caused by promotions is expected to be slightly less in 2014 than it was in 2013, it remains at a historic high.
The full Retail sector update is available for download below (Dutch only).