Getting a Share of Your Stomach | BTalk Australia

(10min 59) The economic downturn is having the expected impact on the food industry, with more and more Australians cutting back on eating out. Does this translate to good news for the retail grocery chains? What impact will shifts in food purchases have on competition within this sector?

In this edition of BTalk Australia Phil Dobbie talks to Martin Kneebone from consultancy firm Freshlogic about how the fight is on for the winning share of your stomach!

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See also: “Woollies Has Us by the Proverbials” Says Joyce | BTalk Australia

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• Today’s Transcript

Phil Dobbie: Hello, I’m Phil Dobbie and welcome to BTalk Australia. Today, what’s changing in the food business? Whatever happens in the economy, we still have to eat, hopefully. The question is: what to eat and where do we eat it? That could change markedly. What impact is the economic downturn having on the food industry? Let’s ask Martin Kneebone from consulting firm Fresh Logic, who specialise in food and agribusiness. Martin, you have a panel of consumers and you track their consumption habits. So what are you finding right now? Presumably people are eating out less would be the first marked change I guess?

Martin Kneebone: Yes, yes it has, in the course of this year. Most particularly in the second quarter, where I think the big adjustments were made and that those that had higher instances of eating out cut back on that, and were buying more food at home.

Dobbie: So does a lower spend in restaurants always equate to a bigger spend on grocery shopping?

Kneebone: Generally there is a link. A dollar in food service doesn’t equate to a dollar in retail because there are other components. But people still have to eat. So if one does decline, the other will increase. In the previous three years, up until the end of ‘08, the trend was pretty much the other way. The expenditure on food service was increasing but there’re more discretionary components in that, beverages and that sort of thing, so the link back to retail food wasn’t as direct. It was a much tougher climate for the retailers to get growth in.

Dobbie: Now you said that the trend away from eating out started early this year. So you think people were already getting strapped for a few dollars or were they just seeing the future and starting to save a little more?

Kneebone: It varied by segment. A group that we would call on, a panel of established families, enjoyed a higher discretionary income and actually moved first. In the second quarter, towards the end of the second quarter, they reduced quite a bit of their discretionary spend in restaurants and swung back. You could see that correlate with what they were buying to prepare at home. The other groups have, have reflected the same sort of trend. The young singles and couples with more discretionary dollars have just woken up — I think the credit card bills have arrived and they are reflecting the same sort of thing now. But what was interesting was that it was established families that were the first group to move.

Dobbie: Now is this, do you think this trend away from eating out is just a short term blip, if we weren’t having an economic downturn? What was the trend before?

Kneebone: The trend before was that food services and eating out were enjoying very strong growth, growth well ahead of retail foods. That’s been true up until the end of ‘07 and it’s only in ‘08 that that it’s changed.

Dobbie: Right.

Kneebone: So, yes, there is a correlation — you look back over history, and it tends to confirm that.

Dobbie: Now when we become more price conscious, that’s when we start to buy supermarket’s own brands. We start to shop around on price a lot more in supermarkets. Does that mean we might start to find fewer brands being stocked by the big supermarket chains?

Kneebone: I suppose two things can drive that dynamic. One of them is that the consumer is definitely more value-discerning and within the category of product, they are exploring and warming to the better-value options in those categories. So they’re looking for it. The other element of that dynamic is that the retailers have expanded their private-label components so there’s a greater availability of those products that are generally, if not all the time, positioned at better value level under the more common separate proprietary brands.

Dobbie: But there is the opportunity of people start buying more of those supermarket-owned brands that they can reduce the product range. Which obviously is an expense for a supermarket isn’t it?

Kneebone: Yeah. I suppose it is an expense. I think that there are two sides to that coin — what the retailers need to arrange is products that sell and turn over and it’s clear that when they have expanded the range of private label, it generally is at the cost of what they might call third- or fourth-tier products. You can’t create more shelves in the supermarket. I always say that in every supermarket there’s twenty five thousand products, but there’s probably fifteen thousand in the car park waiting to get in. You don’t increase the shelf space, you simply reallocate it to more productive products. And the big driver there is what’s in demand and how frequently it sells.

Dobbie: Now we’ve seen a big change is what people are buying in supermarkets, I should imagine, for example, we’re buying more cans of baked beans and less items from the deli counter.

Kneebone: Yeah, the discretionary end of the food, say, let’s say the higher value end of the food categories, have seen contraction and the value end of things has improved, in terms of its proportion of sales. The retailers have promoted pretty strongly, they’ve become more aggressive in some of their promotional planning and execution and that has given people an opportunity to buy some of the centre-of-the-plate items, particularly meats and secondary components of fruit and vegetables at a better value. The supermarket’s been aware that there’s been potentially a greater demand for retail food and they’ve gone out and chased that and picked up some share along the way. They’ve definitely taken a degree of share back from the specialist fresh food people in the last, say, three to four months.

Dobbie: Which is interesting. I’m constantly amazed and I know this varies depending on what part of what city you live in but I get very poor quality fresh fruit and vegetables in my local supermarket and I’m now for the first time in my life I think, shopping separately for those items. But you’re saying the trend’s going the other way. People are more likely to be buying those items at supermarkets today.

Kneebone: The supermarkets have captured some of that escaping business back, but there is still a very high proportion of Australian supermarket shoppers that go through the supermarket and then at the same time (or perhaps at different times of the week) buy perishables through the butcher and the fruiterer and the baker and the delicatessen that they want to patronise. It’s quite common. In the region of 20 to 40 percent of supermarket shoppers in those areas by category go on and buy those items at a fresh food specialist.

Dobbie: All right.

Kneebone: You’re not on your own.

Dobbie: That’s a high percentage. Is that, do you know how that compares with different parts of the world?

Kneebone: I think it’s high by comparison and I think it affects a couple of things: one of them is that we’ve got a very strong and quite robust group of independent fresh food specialists and they’re not just surviving on market conditions. They know what they’re doing, they’ve been through a fairly aggressive period in the last 15 years and the operators that are left are very confident.

Dobbie: I guess that adds fuel to the fire of the findings from the ACCC inquiry. We had Barnaby Joyce on our podcast a little while back. He’s not a fan of the outcome of that inquiry, it’s fair to say. But you guys, Fresh Logic, assisted Cole’s in their submission for that. The finding of that inquiry was that there was what was termed workable competition in the grocery industry. I guess the argument that people are buying fresh produce elsewhere adds to that. But is there a danger with the economic downturn, that some of these smaller competitors are going to be weeded out, and that competition is going to be less workable in the future? Are the supermarkets just going to take an even greater stranglehold on the market?

Kneebone: We did some work with Cole’s. We put together an expert paper on what happens up and down the chain. I think that the competitive intensity in and around fresh food will increase. You’ll probably find the ACCC will argue that that’s the sort of thing that they want. But will it increase to the point where the independent fresh food specialists are unable to compete? I really don’t think so. If you look at the basis for their advantage, it’s pretty strong and they do a very good job. They’re very, very competent operators and the consumers are supporting those outlets because they’re very happy with value and quality and and service and proximity. So it’s not like chain on one or two things that are very exposed on and, like I said, I believe that most of those operators have been in this market for 10 or 15 years and they’ve seen the different spikes of competition.  They’ve lived through them.

Dobbie: So why are those independents doing better in Australia than they are in other parts of the world? Is it to do with the quality of the merchandise? Is it related to prices? What’s to stop the supermarket from saying, “look, if we can just improve our game a little in this area, we can, we can grab a lot more of that market share back”?

Kneebone: Well there’s no doubt that that’s an area they target for growth. We would say that the level of retail sales for those specialists is in excess of $9 billion by the time you take out the food service component. That’s a big part of the local food market. Why are they there? Why can’t the supermarkets simply take them out? Well, there’re a couple of things. I think the shopping patterns of local consumers actually make it quite hard for the supermarkets to compete over the whole 24 hours they operate. There is a major spike in demand around four, five, six o’clock, and that makes it quite difficult for anyone who’s confgured a full service supermarket in Australia to process people at a really attractive level of customer service at that time. Long queues and those sorts of things are common, and some consumers have found that it’s easier and perhaps a more comfortable shopping experience to swing into the strip shopping centre and pick up their fruits and their bakery and the butchery and the nice little cluster of local shops.

Dobbie: All right. One statistic to finish with: Kellogg’s in the US just announced a nine percent growth in sales in the last quarter when a lot of other businesses are saying they’ve got a decline. So those who used to eat out, it looks like they’re not capable of cooking anything for themselves so they’re all just turning to breakfast cereal for dinner.

Kneebone: There’re two things we would say about new young homeowners: they can’t cook and they can’t garden like their parents did and that was because, by and large, two parents have been working and those domestic skills haven’t been passed on. So I think you’re going to get degrees of that.

Dobbie: All right, I’ve got my whole family coming out from the UK for Christmas.  I don’t know how they’re going to survive — three weeks without Mark’s and Spencer’s pre-packaged food …

Kneebone: That’s right.

Dobbie: That’s what everyone in the UK seems to live on. Martin, thank you very much for your time today.

Kneebone: Thank you.