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Discount food retailing in the UK here to stay, say financial analysts.

One long-term effect of the recession could be permanent bargains for consumers. Major multiples, formerly enjoying healthy mark-ups, may have to further pare profit margins to better compete with discounters.

Overcapacity and flat sales in the world's major food markets have created a new style of retailing based on price rather than commodity value. There is nothing new in discount trading, but the consumer's perception of price as a determinant of choice has given a further boost to retailers whose philosophies have been fashioned by price cutting.

In the United States, the country's largest retailer, Wal-Mart, was among the first to see the trend when it opened Sam's Club membership warehouse outlets in the suburbs of major cities. Pace is another similar type of operation. Both invite customers to become dues-paying club members before they can participate in bargain shopping; both offer a huge range of heavily discounted appliances and hardware; both cut their frozen food prices in a way that makes waves in neighboring supermarkets.

In England the warehouse/membership formula has not yet caught on, but the price cutting trend is reverberating strongly among supermarkets. And the depth of recession in the UK has certainly been to the advantage of discount specialists. Financial analysts increasingly categorize discount retailers separately from supermarkets.

The CBI's monthly survey of the distributive trades, moreover, says retailers in April increased year-on-year sales volumes for the fourth year running. The improvement in sales has been mainly reported by the largest stores, confirming the impression that consumers are shopping around for bargains at outlets more likely to be offering discounts. Mail order companies have generally experienced strong sales growth.

Among different sectors of the retail industry, most report steady increases in demand with stores selling books, shoes, food and pharmaceuticals doing particularly well. J. Sainsbury, Britain's biggest retailer, this spring reported a 16.7% increase in full-year pre-tax profits. The group's results, which exceeded |pounds~10 billion ($15.4 billion) for the first time, compared with the 6.5% gain posted by its rival, Tesco.

Sainsbury's is rarely categorized among the discounters, but Kwik Save, the discount store leader in the UK, claims over 788 stores throughout England and Wales -- more than Sainsbury and Tesco put together. According to Nick Goss, sales and marketing executive at Kwik Saves' Prestatyn, North Wales-based headquarters, Iceland is no longer involved in managing the company's frozen food departments. It is handling the program entirely with a brand-led philosophy, but featuring lower prices. Kwik Save outlets are generally smaller than most superstores, averaging around 6,500 square feet of selling space.

At the end of April, the company announced a 14.3% increase in sales for the 28 weeks ending March 13, 1993. Operating profits rose by 16.3% while pretax earnings were up 19.1%. Goldman Sachs & Co. had projected an actual pretax profit of |pounds~62 million with a 5.4 pence dividend. Baring Securities forecast |pounds~60 million and a 5.25 pence dividend.

Sales by discount food stores in Britain reached |pounds~3.6 billion in 1992, or nearly 8% of the |pounds~46 billion spent on food at the retail level, according to Goldman Sachs. Other discounters in the UK include Aldi, Netto, Argyll's Lo Cost, Dales, and Gateway's Food Giant.

The Common Market has now brought the Germans into the act. Rewe, one of Germany's largest supermarket multiples, last month bought a 26% stake in Budgens, a small British food retailing chain formerly owned by Booker McConnell. Rumor had it that Costco, third-ranked USA warehouse store operator, was planning to invest in Britain -- before the announcement that Costco had been acquired by second-ranked Price Club.

What is incontravertible about the British market is that attitudes to price have changed permanently. Until recently, Kwik Save, which was established in the 1960s, was the only discounter with stores spread around the UK. The company, which started off with 35 stores in 1965, now trades from 788 in England and Wales. It is Britain's third largest grocery chain with an 11.6% volume share of the market (AGB March 1993).

Kwik Save's appeal in the UK has risen as shoppers learn that lower prices do not necessarily mean lower standards. Market research undertaken by Gallup shows that many shoppers prefer local specialist retailers to more remote units that attempt to sell everything. The predominantly High Street and edge of town locations occupied by Kwik Save help keep shopping local.

Specialist niches such as those identified by Kwik Save have clearly attracted the attention of the European behemoths such as Rewe, a private company with 8,000 stores and 15% of the German food market. Budgens, the UK chain it acquired last month, has 100 supermarkets situated mainly in the south-east of England.

In Germany, Rewe currently operates more than 1,400 discount groceries called PenyMarkt, as well as supermarkets and hypermarkets. Aldi, Germany's largest food discounter, opened its first stores in the UK in 1990, followed quickly by Netto of Denmark. They now have 63 and 45 stores, respectively, and both have announced ambitious expansion plans.

Opportunity Knocks

Specialist niches are still available in Britain's retail market, however, and as such provide new opportunities for frozen food companies. The Iceland freezer center group, which has been adept at finding opportunities, in April stirred the UK industry by announcing that an agreement had been reached to manage 48 Iceland stores in Littlewoods, the variety store and football pool conglomerate.

Later that month Littlewoods had its own surprise for the market in the form of a joint venture with Price ClubCanada. The aim is to open at least one North American-style warehouse club in the UK before the end of the year.

Warehouse clubs, which for some time have been forecast to have a big future in UK retailing, sell a limited range of food and non-food items at every-day low prices to members who pay a small annual membership fee. America's Costco had reportedly taken two sites in Great Britain before Price Club took it over. Meanwhile, Nurdin and Peacock, the UK cash and carry concern, has said that it would open two warehouse outlets.

So, the faces of retailing in the advanced Western countries are rapidly acquiring new features. But the way in which traditional forms are perceived creates new styles that few would have recognized a decade or more ago. Who would have seen Iceland in England, for example, as the major force it has become. In the April issue this magazine reported on the new link with the Littlewoods variety store chain. Shortly afterwards, Iceland announced that it was going to discard the traditional freezer center image by changing its name to Iceland Group.

Chairman Malcolm Walker, announcing a 20% increase in annual pre-tax profits to |pounds~55.4 million, described 1992 as an "absolutely brilliant year." He has increased his forecast of 1,000 stores in the UK to 1,500, pointing out that the Group was no longer a frozen food center as in the 1970s and '80s. Frozen foods now accounted for some 56% of food sales. Chilled foods increased from 11% to 13.5%.

A number of European and American retailers express concern at the widening consumer niche that encourages the growth of private labels. A recent survey by Conzept International (a British branding consultancy) among 200 UK-based consumer goods producers -- half of them in the food and drink industry -- found that fewer than a fifth derived less than 10% of their total revenues from private label manufacturing. The main reason for engaging in such packing, mentioned by 30% of the companies, is to provide greater security for continuing sales revenue. Some 17% cited the opportunity to cover fixed costs.

Meanwhile, Unilever and Nestle continue to battle for supremacy in the European market, but both are active in North America as well. Unilever increased pre-tax profits 13% last year to |pounds~2.03 billion (US$ 3 billion) helped by a recovery in North America and a strong performance in Latin America and Asia.

Nestle, the world's largest food company, is invoking a 1990 US Securities and Exchange Commission rule which permits non US-registered companies to make offerings to "qualified institutional buyers." Helmut Maucher, chief executive, told the group's annual press conference in Zurich during May that first quarter group sales rose 6% to |pounds~13.5 billion (US$ 9.2 billion).

Upcoming ANUGA Show Big on QFF, Ice Cream

Frozen foods and ice cream will be an important part of the ANUGA World Food Market scheduled for Oct. 9-14 in Cologne, Germany. Manufacturers of such products will utilize up to 14,000 square meters of exhibition space in Hall 10.1.

Held biennially, this year's ANUGA is expected to showcase a wide range of foodstuffs from some 6,000 suppliers hailing from 90 different countries. It will be held at the Koln Messe and feature over 260,000 square meters of exhibits. For additional information, contact the organizer in Germany by phoning 221 821-0.
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Title Annotation:includes related article
Author:Kemp, Graham
Publication:Quick Frozen Foods International
Date:Jul 1, 1993
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