Former Vice President, Fresh, Frozen & Chilled at Asda and former Buying Director, Iceland Foods
Karl has spent the majority of his career in food retailing, joining Sainsbury’s after graduating in the mid 1980s to work in the trading department. He joined Iceland in 1992 to eventually become trading director, responsible for all buying, with a position on the board of the company. After 5 years in senior commercial positions at UK facilities management business Sodexo, in 2010 Karl joined Asda, the UK’s second largest food retailer, to run the food trading team. At Asda he was responsible for fresh food, chilled food and frozen, categories with combined revenue of ~GBP 8bn and gross profit of ~GBP 3bn. Since leaving Asda Karl has taken on a range of consultancy roles, including a year working for Sainsbury’s Netto discounter concept, where he gained deep insight into the discounter retail format. Read moreView Profile Page
There are a number of trends the major UK grocery retail players have had to contend over the last few years. In no particular order, there’s the hangover from the space race, the rise of the online channel, the large market share gains of the discounters at the expense of the large four incumbents. What stands out to you about how the incumbent players have navigated these changes in the market?
I think that clearly all of those factors have played some part in the evolution of the industry over the last 10 years. Maybe the roots of it were laid when Aldi first came into the UK in 1990. The one, for me, that is most obvious when you look at the analysis and the numbers and share performance and impact on top and bottom line is the rise of the discounter format. A number of years ago it was perceived as never being relevant to the way the British person wanted to shop. A sense of foreign discounters selling cheap food piled high that isn't very good quality, the service proposition is not very good, no baskets or no trolleys. There was a whole plethora of negativity around the discounters. For me, customers have clearly changed their perception of shopping for food in a different setting.
The speed at which that has gained momentum is quite remarkable really. I joined at Asda in April of 2010, at that point, Aldi and Lidl had a share of 3-4% of the UK market and it had taken them 20 years to get there. 9 years further on, they've got a share of just over 13% as measured by Kantar in the last 12 weeks. And they’ve probably got a volume share, which is the most important dynamic from a retail perspective, of more like 17%. That is just staggering. So, whilst online, and the space race, and store size and all that, are all very relevant, all those factors combined support this discounter argument. At the end of the day, the discounters aren't online. It's clearly not a factor in their performance. You could argue that it's a factor in the performance of the big four, in the sense that they overinvested and over-relied on online, in my opinion. The resources that have been put into there, the financial resources and the manpower, could have been better used to reposition themselves on price to a certain extent. I think it's absolutely the growth of the discounters and all the reasons behind that have brought the biggest change.
When you were at Asda in 2010 how was the discounter threat assessed? How did people within the company think of the competitive threat?
I joined as commercial director, so that was a board position and I had responsibility for the whole of the fresh food category. So the revenue was about £8.5 billion and the GP was about £3 billion a year. Just after I joined Andy Bond resigned and handed the reins over to Andy Clarke. I'd worked with Andy Clarke at Iceland, an even more value conscious retailer, High Street based, predominantly frozen food. Andy had been there for about 12-18 months and we had struck up a good relationship. He came down to my desk literally within the first 2 or 3 weeks of me joining the business and he said “What's your view? Impress us.” And I said, “You’re far too expensive. You're losing share in all the big categories and you need to do something on price.” So we invested the thick end of £100 million and it started to turn round the volume performance. Clearly, there was a bigger issue with deflation and a fairly chunky issue on the bottom line at that point in time, but it was covered by other categories. For the next two years, we pursued a strategy of much more aggressive pricing, like the discounters, on the key items, bread, milk, beef mince, those types of products.
Then, in 2013, there was a distinct change in approach and the foot came right off the gas in terms of investment in price. In the end, I got so frustrated that by the middle of 2015 I decided to leave the business, because I couldn't see how my belief about what we needed to do was compatible with Walmart's desire to protect the bottom line. When you are expected to deliver messages to a team of 200 people and your own belief about those messages is not consistent then it's time to move on. That's what I eventually did.
They were consciously aware, from a big four perspective, that value for Asda was everything. The quality perception was below where it was for other big four retailers. The availability perspective and range statistics were below the others. They had a good position on newness and event management, so getting behind Valentine's Day or Christmas or Easter. They scored well and highly on innovative products for customers. And they scored quite high on the service proposition. Ultimately, value and pricing were the most exposed in my view, and probably still are, from the discount threat. Five years on, they've lost two and a half points of market share. I put that directly down to their unwillingness to invest in the price proposition when it was really required.
There were one or two opportunities that I think they also missed. In 2010, about 3 or 4 months after I joined, they acquired the Netto business. They had to divest some stores for that, from a competition perspective, but they ended up with 150 supermarkets between 15,000-25,000 square feet. There was a big debate at the time about how to position that format, and they chose to go supermarket, they chose to go range, so 14 different types of olive oil. And on the price position, Asda have got one national price position.
There was an alternative, which was to go discount. With hindsight and connecting the dots, they probably made a mistake at that point. They had a trial in Pontefract, I can’t remember what the store was called, I think it was ‘Essentials’ and they argued the numbers didn’t stack up. That had been running for about 18 months. The then trading director Darren Blackhurst, who’s now at Morrisons, was a massive advocate and believed in the discount market and believed that those 140 stores should have been turned into discounters, but they passed up on the opportunity.
Let’s talk about the underpinnings of the discounter model compared to the Big Four retailers.
I think it's a tough one to try to break down and make as simple as possible. In my view, initially, it's all about price. But it's a bit like Jim Collins’ flywheel principle, once the flywheel gets moving in a certain direction and momentum is created, there are a number of other reasons which start to build and the flywheel just keeps getting faster and faster and more and more difficult to stop.
Going back to 2008, obviously there was a significant recession and customers’ disposable incomes were falling, so the requirement for a lot of customers to shop in a discount operation became more relevant. Even if they didn’t particularly want to be seen in an Aldi or buying Aldi products and having them in their fridge, there was a requirement for them to do that. And with a 20-25% price differential, that’s a compelling reason. Added to that the fact that it’s a limited range, means that when you shop in a discounter, there isn’t the temptation to think, “I like that garlic bread with a bit of cheese on it, but it’s double the price of the normal garlic bread” because it just doesn’t exist in a discounter because there isn’t the range. Not only are the discounters cheaper on everyday items, but there isn’t the seduction to buy other items. When the customer walks out of the discounter the message that they used to give to us was: “It’s so cheap in there, my basket in Sainsbury's is £120 and at the discounter it’s £70.” That was the ultimate driver.
Where I think the discounters have scored exceptionally well, and in some cases possibly without giving themselves enough credit for it, is the quality of their products has improved. Most of what they did was clever, they went to the factories and the manufacturers that were supplying the big four. By the way, overall, the supplier base would have a fairly negative perception of the big four, they believe they’re bullies, they believe they get them in there and squeeze them down on price and their tactics are unethical in a number of examples, hence the whole grocery code of conduct.
A new kid comes on the block, very simple and easy to deal with, no category management, no nights out, no Wembley football tickets, so very low cost to deal with, keep it dead simple. And they think: “We can give these discounters marginal capacity and we can give these guys really good product. All we've got to do is turn up there, we’ll do a 6-month contract, they’ll buy the product, they pay us on time,” because the Germans have just got a very good mentality on payment. They were then able to wrestle and sort the supply base out playing around at the edges. I’ll come back to that because I think that’s moving on a little bit now as their volume gets bigger and they can’t pick up the marginal excess capacity in the market.
On that basis, they were able to produce some really, really good quality product. It’s a lot easier if you’re running a carrot cake down the line to Sainsbury’s specification to just switch the packaging to the Aldi product, rather than having to re-engineer something that might be inferior to sell at a pound less, if you get my point there. That gave them the edge on quality. Their pricing mechanisms around everyday low price are very compelling to customers. Customers have become very, very suspicious of buy-one-get-one-frees, one minute it’s £1, the next it’s 50p, it’s advertised as half-price and then the next minute it goes back to 85 pence, that yoyo pricing in the big four, which they’re fixed into because it’s what drives their volume. Discounters don’t do that and that gives customers confidence that if the prices come down, it’s a genuine reduction, if the price has gone up, it’s a genuine increase. There’s a reliability there.
Non-food is a really important part of their proposition. It represents somewhere between 10% and 15% of their sales. It looks like a jumble sale when you walk into the store, but it’s very compelling. It drives customers to come in every week to see what’s new and different in that store. And you can get some amazing bargains on products you would never even imagine you would walk in there to buy, fishing tackle, shower units, garden gnomes, I mean the list is endless. But it’s all very well executed. It looks like a jumble sale, but it’s tapped into this “I can get a bargain in here, because that’s a really good product.” What that does is it drives customers in but it also drives roughly about 40-45% margin mix, which is incredibly healthy for the bottom line. The big four have not been able to find a way to add that level of flexibility and churn into their offer. Basically, the methodology there is: you open up on a Thursday morning with a weekly leaflet advertising those products, you hope to have sold something like 60-70% of it by Sunday night, the balance of it gets sold Monday, Tuesday, some of it has to be cleared through, some of it ends up as waste. But the idea that you’ve got to get in there on Thursday or Friday if you want to guarantee you’ll get stock. It’s a call to action.
Location is important for the discounters. People are fed up of having to spend 3 hours in a big supermarket. You can shop at a discounter in a quarter of the time it takes to get the escalator to get to the top floor at Asda Pudsey. What the big four once considered to be a real asset for them, which was getting everything under one roof, has now been turned on its head because the stores are too big to shop. What you’re tending to find is, whilst we weren't losing customers necessarily, we were losing a fairly significant share of their basket because they would make two shops. They would go to an Aldi to spend their £70-80 on their core essentials and then they would go to the Asda up the road and they would pick up the items that they couldn't buy in an Aldi. Spend was going down but you were still having to satisfy that customer.
Aldi and the discounters store locations position was incredibly well thought through. When you look around - maybe not so much anymore because some of that space is saturated now - they are almost cannibalizing the big boys by being located exceptionally close to them. They are almost in their car parks. When you read articles back in the early 90s and 2000s, people were saying these guys will never break in, they’re a different proposition, they’re a different market. Slowly but surely as customers have become more and more aware of the fact that you can get great value and great products, and there has been a blurring of the two perceived markets, people who shop in discounters and people who don’t.
What led the incumbents to think there were two markets?
Their ignorance and naivety.