Supermarket Profitability Investigation John Thanassoulis1 University of Oxford January 2009
Executive Summary This is a statistical investigation into the profitability and growth of UK supermarkets over a period spanning the last 30 years. In compiling this research I have made use of the following data sources. Firstly two sources of company financial data. The first is collected by Thompson’s DataStream and runs from 1980 to the present. The second is collected by Orbis and runs from 1998 to the present. In addition I have used the Competition Commission reports into the UK grocery sector from 2008 and also from 2000. Finally Office of National Statistics (ONS) data were also employed to place grocery sales into a national context. The data will be introduced in detail at the appropriate points of the analysis. The research is ordered according to the original question numbers requested by Channel 4. The headline results of the analysis are as follows: a) Over the last 30 years supermarket profit margins have been broadly flat at around 5%. They have not been growing as a result of increased consolidation. Thus more money is not being made per product sold. b) The last 30 years has seen the largest supermarkets grow to represent a huge fraction of the industry. As a proportion of grocery spending the largest 3 supermarkets have expanded their share from under 20% in the early 80s to over 70% now according to initial estimates allowed by the available data. This is against a backdrop of declining total spending on groceries – yet total spend at the largest supermarkets is growing. So overall, as the UK consumer spends less on groceries, they are spending more (in absolute levels) at Tesco, Asda and Sainsbury. c) Allowing for food price inflation the main three supermarkets have seen growing profits over the last 30 years: of the order of 2 to 3 times for Sainsbury and Asda. Yet Tesco has been in a different league with real profits growing nearly 9 times in 20 years since 1987. The timing of Tesco’s puling away dates to the mid 1990s. At this time two decisions were taken by Tesco which seemingly led to this success:
I am very grateful to Howard Smith for very detailed comments on a first draft. I am also very grateful to Jouni Sohkanen for excellent research assistance. My gratitude goes to Wall‐to‐Wall Media, on behalf of Channel 4, for financial support for this research project. All errors and views are my own.
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John Thanassoulis
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i. A continued focus on UK expansion even as the planning regime for out of town stores was being tightened. At the same time Sainsbury’s opted for US expansion and Asda was trying to deal with a financial crisis. The introduction of a loyalty card scheme (clubcard) whose data was analysed in detail to help refine the offer in store and target promotions at individual consumers.
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d) Size has granted the large supermarkets some buyer power against their suppliers – but only for secondary branded and own label goods. An increasing move to own label goods has thus allowed costs to be kept down and contributed to the supermarkets being able to fight off the arrival of the deep discounters (Lidl, Aldi etc). For some of these goods the supermarkets’ share of revenues has increased markedly (milk, fruit). e) In recent years the largest supermarkets have been growing by expanding into the convenience food sector. The major losers of market share have been small grocers – the major winner has been Tesco. Others have been holding their own. Summary of results by original question number 1. To what extent have the supermarkets managed to protect their margins when it comes to food sales over the last 10‐20 years? Over the last 30 years supermarket operating margins have held broadly steady: in particular margins have not been rising as consolidation
