Has the supermarket business model failed in 2023?

With recent shortages and rationing of everything from eggs to tomatoes, something is clearly amiss in the UK supermarket sector. New financial research from Plimsoll reveals a sector that is struggling to make a profit, despite public perceptions of profiteering and solid growth in recent years. So, what has happened to Britain’s supermarket industry?

The government’s food czar Henry Dimbleby has said the UK has a “weird supermarket culture” and that food shortages are the result of broken fundamentals in how food retail works in Britain. The British Retail consortium disagrees, claiming supermarkets recognise the challenges and “work with growers every day” while sacrificing margins to shield UK consumers as best they can.

The UK industry in 2023 is vastly different from what it was just a few years ago. Significant transformations, driven by changing consumer preferences, technological advancements, and an increasing focus on sustainability have been evident for a while. Much of this change was rapidly advanced by the pandemic.

One of the biggest changes has been the rise of online shopping. In 2023, online sales are expected to account for more than 30% of the industry's total sales, up from just 7% in 2019. This shift, brought to the fore by necessity during the pandemic, has been cemented by the convenience of shopping from home, and a near-universal adaptation of retailers offering home delivery and click-and-collect services.

Another major trend in the UK supermarket industry is the growing demand for healthier, more sustainable and specialist options such as vegan foods. In response to changing consumer demand, many supermarkets have introduced their own range of organic and sustainable products, while working to reduce their environmental footprint through initiatives such as reducing plastic packaging and promoting sustainable farming practices. All these initiatives are expensive and inevitably have an impact on the bottom line of supermarkets.

Finally, the sector in 2023 is characterized by intense competition. With the rise of online shopping and the increasing focus on sustainability, retailers are under pressure to differentiate themselves. This has led to a wave of innovation and experimentation, with retailers introducing new products, services, and store formats in an effort to stand out from the crowd. All at significant cost and all while the “price match” wars continue in the face of disruptors such as Lidl and Aldi.

Plimsoll has produced its latest study to assess the financial impact this recent wave of change has had on the UK supermarket sector. The latest Plimsoll Analysis individually assesses the top 145 UK supermarket companies. It shows a number of developing trends that should be of concern or excitement for business leaders throughout the industry, including:

Almost 1 in 5 supermarket companies are financially exposed

33 of the 145 companies included in the Plimsoll Analysis on UK supermarkets are rated as Danger. This is an early warning that many of the country’s leading food and household retailers are carrying vulnerabilities in their financial performance. How will these are you missing a sentence?

M&A deals now appear to be inevitable

With a growing polarisation between cash-rich businesses and undercapitalised rivals that need an injection of funds, a period of consolidation looks inevitable. The Plimsoll Analysis has named 32 of the UK’s 145 leading supermarket chains that are ripe for takeover. How many of these companies will be bought by another UK company or could there be further investment coming in from overseas?

Demand continues to grow but profits are falling

Year-on-year sales are up 6% (after 10% growth in the previous year) as prices rise and consumers become more willing to pay more for ethical or specialist products. However, margins are not following suit. According to the latest Plimsoll Analysis, this sector's margins remain wafer-thin at 1.4%. Can the race to price match Aldi and Lidl be sustained in the current inflationary environment?

The latest Plimsoll Analysis is a valuable resource for those working in the retail sector, the supply chain that feeds into supermarkets and anyone with a vested interest. Imagine the convenience of having every leading supermarket operator in the UK assessed, valued and rated on their financial strength in one convenient study.

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