April 2014

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Is there an opportunity for convenience online?

Opportunities for smaller retailers are limited

They lack the range to support online

Most convenience retailers are not used for whole weekly shops and therefore providing an

online service with either home delivery or click & collect is not necessary. These smaller stores

lack the ranges of the larger supermarkets and therefore the average transaction value would be

too low to justify the investment in an online service. Even if these smaller stores were to expand

their ranges, they would still not offer the breadth of products that the supermarkets can provide,

and with higher prices most people would continue to use the online service that the large

multiples offer.

The cost of a delivery infrastructure is too high…

Another restriction on providing an online service is the high cost of setting up and running this

operation. A retailer would need to invest in vehicles and staff to provide a home delivery service,

and even if it was just a click & collect operation it would still require additional staff to ensure

orders were picked in time for collection. As smaller retailers are less able to absorb these high

start-up costs, they would deter them from offering the service unless they could guarantee a

significant return on their investment.

…but third parties make online retail more accessible

However, there are an increasing number of companies that can help smaller retailers get online

and promote their business. Amazon allows companies to sell their products through its

marketplace, which helps them reach a much wider audience and benefit from its delivery

service and trusted security. There are also companies such as Bigcommerce in the US that will

help design and run your website as well as improving its functionality. Local delivery solutions

for small independent stores also exist, such as Hubbub in London, which manages customer

orders, collects the goods from the relevant store and delivers them to the customers.

Figure 1: A Hubbub delivery van, 2014

Source: Hubbub, Verdict V E R D I C T

April 2014

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Tobacco legislation to have the greatest impact on convenience

retailers

Smaller stores disproportionately affected by tobacco display ban

Tobacco firms will support their more valuable clients…

Figure 2: Landmark Wholesale tobacco display, 2014

Source: Landmark Wholesale, Verdict V E R D I C T

The tobacco display ban, which is already in force in stores over 3,000 sq ft, will be extended to

smaller stores on 6 April 2015. It is in the interest of the tobacco firms to support retailers in

preparing for these changes by providing information on the changes, and paying for the

necessary work to be carried out, so that retailers continue to demand the same volumes of

tobacco products. However, with so many small retailers to convert, the tobacco companies will

prioritise the retailers with higher sales, as they are their more valuable clients and so they will

want to encourage them to stock and sell their products despite the new legislation.

…leaving smaller retailers unsupported to implement the necessary changes

The greatest burden of the tobacco display ban will fall on the retailers with the lowest tobacco

sales, as many will see their gantry agreements terminated, forcing them to pay for the

necessary instore changes themselves. Proportionally, the cost of the changes is much greater

compared to convenience multiples as well, because total sales are lower while the cost of the

display solutions will remain roughly the same. These stores also rely more heavily on these

products to drive footfall and so cannot afford to stop selling them. It is therefore down to the

suppliers and wholesalers to offer greater support to the smaller retailers to help offset these

additional costs.

April 2014

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Footfall and impulse purchases would be reduced in convenience stores

Tobacco is an important product for convenience stores because as well as making up a

significant proportion of sales it is also a key driver of footfall to stores, which then supports

further impulse purchases. While if someone wants to smoke this ban will not prevent them from

purchasing tobacco products, some impulse purchases will be lost as there is no product

visibility. To maintain sales, retailers must therefore ensure that they have adequate POS so that

customers are aware that tobacco products are sold instore.

April 2014

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What is the future for co-operatives?

The Co-op group must re-connect with members

Current strategy starting to address issues

The Co-op group’s food business has started to turn around its fortunes and Steve Murrells

appears to be taking an aggressive tack in turning the business around, focussing on

convenience stores and targeting a significant number of new openings. On top of this, the

retailer is looking to refit its existing portfolio with the aim of developing stores that better suit

shopper missions. We feel this will have a positive impact on the retailer’s performance in the

long term; however, it still has issues in terms of pricing, quality and availability that must be

addressed also in order to stage a full turnaround.

Regional retailer struggling nationally

One issue for the food arm of The Co-op group is its attempts to act as a regional player in a

world dominated by national giants with far greater scale. Its attempts to develop tailored offers

to individual stores have been poor so far, especially with the integration of Somerfield sites, and

there must be more regional and local adaptation and flexibility. While the likes of Sainsbury’s

and Tesco offer little in the way of local variation in terms of their convenience offer, they have

clearly tailored convenience ranges, and more competitive prices, furthermore they do not try to

be a regional grocery chain and shoppers fully understand it. The Co-op must look to devolve

power from central teams in Manchester to regional ones and allow stores to set their

convenience agenda depending on who the shoppers are.

April 2014

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Member engagement will be the key

However, the biggest issue for The Co-op group across all of its businesses, but especially in

food, is the lack of member engagement. The group boasts an impressive 7.6 million members in

2012 (the latest figures available at the time of writing) yet only 18.4% of these shop across

multiple businesses.

Figure 3: The Co-operative group grocery shoppers versus group membership (million), 2009–

13

6.26.4

7.3 7.57.0

5.1

5.8

7.27.6

1.1 1.2 1.4 1.4 1.3

2009 2010 2011 2012 2013

Shoppers, million Members, million Main users, million

Note: shoppers are those who use The Co-op for some of their grocery shopping. Main users are those who use The Co-op for all of their grocery shopping.

Source: Verdict, The Co-operative Group V E R D I C T

While the shopper numbers for the food business are close to the number of members for the

group as a whole, many of these shoppers use the retailer not for the membership, but for the

convenience and location of The Co-op's stores. However, this advantage is diminishing; while

The Co-op group has not released member numbers for 2013, Verdict’s How Britain Shops

survey has identified that food shopper numbers have declined over the past year as competition

in the convenience sector has intensified.

April 2014

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Loyalty driven by convenience rather than ethics or reputation

While The Co-op has high levels of loyalty compared to other grocery retailers, this is linked too

closely to convenience, with 70.0% of grocery main users in 2013 stating that they are loyal to

The Co-op because of this factor, the highest in the sector. As mentioned previously, this is at

risk owing to the aggressive expansion of The Co-op's rivals, which can be as convenient but at

lower prices. The Co-op outperforms the rest of the grocery market in two other measures –

honesty and fairness, and environmental and ethical – at 6.0% and 7.0%, respectively. However,

for two of the most significant pillars of its business, The Co-op needs to be attracting more

shoppers for these reasons for its membership to be meaningful. While The Co-op does not

provide statistics for those shoppers that use individual parts of its business, there is a pool of

over 7 million potential customers with an interest in ethics, fair trading and the environment that

should be actively targeted by the food business.

The full report is available to purchase in our store.

To find out more about the current opportunities in the neighbourhood & convenience retail

market, please contact enquiries@verdictretail.com

Some of our channel reports:

UK TOWN CENTRE RETAILING | VERDICT CHANNEL REPORT

UK OUT OF TOWN RETAILING | VERDICT CHANNEL REPORT