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Non-Food Sales in Supermarkets Market Assessment 2008
Key Note Publications Ltd, Jan 2008, Pages: 114
The multiple grocery chains have offered non-food basics such as toiletries, disposable paper products and cleaning items since first opening in the 1950s. However, the abolition in 1964 of resale price maintenance (RPM) on most products, whereby a manufacturer and its distributors agreed that the latter would sell the former's product at certain prices, meant that supermarkets could compete fiercely on price. With profit margins on non-food items being higher than those on food, there was more room for manoeuvre, and buying in bulk allowed supermarkets to squeeze suppliers' prices and sell discounted goods. Furthermore, the relocation to larger, out-of-town sites in the 1980s gave many supermarkets the additional space required for extending their non-food offering. ASDA, in particular, focuses on non-food sales, not least because its stores are generally much bigger than those of its competitors. In addition to selling non-food items, the supermarkets are also selling services and utilities, capitalising on their trusted brands, and forging partnerships with other companies.
The non-food offering is a method of differentiating one chain from another in a way that is not always possible with food items. Some of the non-food brands have been phenomenally successful — such as ASDA's George clothing brand, which has helped the chain's clothing sales to outstrip those of Marks & Spencer. Supermarkets can also `cherry pick' lines, taking advantage of the time and investment that manufacturers and specialist traders have put into knowing their markets, and varying products on offer according to the season. The development of online shopping facilities has enabled the likes of Tesco to deliver large electrical appliances, music and books, gardening equipment, etc. direct from manufacturers and warehouses. Tesco is intent on increasing the value of sales of its non-food offering to equal that of food sales. In its 2006/2007 financial year, its sales revenue derived from the former rose by 11.6%. Its non-food sales were worth £10.4bn worldwide, of which £7.6bn was attributable to the UK alone. Nevertheless, Tesco claims that, at 8%, its share of the UK non-food market is relatively small; it has ambitious plans to fully exploit the potential for expansion. In September 2006, for example, Tesco launched Tesco Direct, a new online and catalogue operation offering general merchandise, some of which cannot be found in Tesco stores. By the end of its 2006/2007 financial year, Tesco also had six trial non-food stores under the Homeplus brand and had extended 23 of its stores to add more than half a million square feet of non-food space.
The apparent power of the supermarkets — particularly Tesco — is such that in May 2006, the Office of Fair Trading (OFT) referred the position of the grocery multiples in the retail sector to the Competition Commission. The OFT expressed concern at the way supermarkets were selling nearly 3,000 popular products at below cost price and were using local price cuts and promotions to put pressure on smaller competitors. It was also concerned about the way the supermarkets were using their increasing buying power in deals with suppliers, and about their acquisition of hundreds of development sites, many of which may have been acquired solely to prevent a rival opening a store. The OFT also said that there was evidence that the large supermarket chains had erected barriers to keep out new players, and that their move into the convenience-stores sector could distort competition and disadvantage consumers.
In October 2007, the watchdog delivered its preliminary findings, in which it cleared the supermarkets of driving their smaller grocery rivals out of business but stated that the large supermarket groups were not competing effectively in some parts of the country. It also uncovered evidence that the large grocers were making unfair demands on suppliers. However, there was nothing in the report to threaten Tesco's dominance in the market, and the grocer's share prices climbed to a near all-time high. Groups representing suppliers and smaller traders expressed disappointment at the Commission's findings. Among them were the Forum of Private Business, the Federation of Small Business and the New Economics Foundation. The report also proposed a shake-up of the planning system, replacing the so-called `needs test' — which does not allow supermarket groups to build new stores unless they can prove that a new outlet is required — with a `fascia test', favouring retailers not currently operating in an area. These are the provisional findings of the Commission; the supermarkets and other interested parties will have a chance to respond before its final report is published in May 2008. There is little to indicate that any measures will be taken that will threaten the invincibility of Tesco.
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