Five year forecast: the grocery market by 2021

Date : 16 June 2016
Five year forecast: the grocery market by 2021

As we launch our new UK grocery channels five year forecast, IGD Senior Retail Analyst Nick Gladding outlines the new numbers and highlights the opportunities they present.

An unforgiving market

In recent years growth in the UK market has been hard fought, as lower prices have generally enabled shoppers to spend less on groceries. While we can attribute part of this to the rise in popularity of discounters, actions by the main multiples to improve their pricing and defend market share have also made an impact.

The headlines

Looking ahead, IGD is predicting the UK food and grocery market to grow by 9.9% over the next five years to £196.9bn as the sector works to resolve some challenges.

Here are the headlines:

  • Hypermarkets and supermarkets are set to see a stabilisation in sales by 2021, as large stores evolve to reflect the changing needs of shoppers
  • Online will remain the foremost growing channel at +68% over the next five years
  • By 2021 discounters will be worth £24.9bn, although growth will be more measured than in previous periods
  • Convenience will remain the third fastest-growing sector, yet will also see a slowdown in expansion

Sales will stabilise through larger stores

  2016 value (£bn) 2021 value (£bn) Change in value %
2016 - 21 
Hypermarkets 16.5 16.6 +0.2
Supermarkets 86.6 87.3 +0.8

In the new forecast, we predict sales will be stable over the five year period, with a further short term decline, balanced by slight growth from 2019 onwards as shoppers respond to initiatives to make larger stores quicker to shop.

In recent years shoppers have increasingly switched their allegiance from larger stores to channels that better suit their needs, but this is changing. A rapid rise in the quality of convenience stores, ever improving standards in online and ambitious store opening programmes by discounters have together given shoppers alternatives to supermarkets and hypermarkets.

To fight back against these challenges, large store operators are pursuing a number of initiatives. The development of mission-based layouts will help them become much more relevant for those looking for solutions for their next meal, while improvements to service and range, as well as sharper pricing, will allow them to compete more effectively. Introducing simpler pricing structures and lower overall prices will also work in their favour.

Bringing new concessions into large formats will help drive footfall for the core grocery offer. For example, Sainsbury’s planned acquisition of Argos will see a new dimension added to its stores.

More generally, the development of click and collect and advances in smartphone store navigation technology will help larger stores compete better.

Including relevant foodservice options is another option is another tactic with much potential to provide new reasons to visit larger stores.

Waitrose King’s Cross: hospitality options include Waitrose’s first in-store bar to serve draft ale

Slower growth through convenience stores

  2016 value (£bn) 2021 value (£bn) Change in value %
2016 - 21 
Convenience 37.5 41.9 +11.7

With such rapid development of the convenience channel over recent years, high quality sites for new stores are now hard to find and new store openings are more likely to involve some degree of sales cannibalisation for multiples. That said, there is still considerable opportunity for experimentation: both larger and smaller convenience stores can adapt to meet food-for-now and food-for-later missions, especially if they’re in a suitable location - for example, close to transport links.

Co-operatives in particular are well placed for further growth as they pursue ambitious expansion plans, supported by a range closely aligned to local shopper missions.

Tesco Queensway: a 60:40 fresh:ambient split is used, the reverse of what Tesco would typically do in a store of this size 

New entrants will enable online to maintain growth

  2016 value (£bn) 2021 value (£bn) Change in value %
2016 - 21 
Online 10.5 17.6 +68.3

Online will remain the fastest growing grocery channel as new players continue to provide shoppers with different choices. Already in 2016 Aldi has launched Special Buys and wine online, and just last week AmazonFresh made its much anticipated debut in the UK.

At the same time existing players are working on improving the quality of their services, with better search functions and improvements to product descriptions and taxonomy making online shopping easier.

Capacity improvements through new dark stores will support channel growth, while a greater focus by retailers on communicating the advantages of grocery click and collect will make this a much more popular way to shop online.

AmazonFresh: extensive range and rapid delivery will be the key attractions for shoppers

Discount to claim £1 in every £8 by 2021

  2016 value (£bn) 2021 value (£bn) Change in value %
2016 - 21 
Discounters 17.9 24.9 +39.5

Rapid physical expansion by food and high street discounters will fuel growth in this channel.

Both Aldi and Lidl are developing formats that offer a supermarket-style customer experience while retaining their low cost advantages. High street discounters such as Poundland and B&M are also targeting opportunities in grocery, which naturally also takes them into competition with local convenience stores.

Discounters’ core value proposition and ‘treasure trove’ experience drives excitement in the channel and brings in new shoppers, while a more flexible approach to pricing is allowing them to offer products beyond the £1 price point.

Lidl’s store of the future closes the gap between discounter and supermarket

Supplier implications

Opportunities for suppliers could be greater following range review work that simplifies customer choices at the fixture.

Greater competition in the convenience channel will make retailers scrutinise ranges more forensically, so ensuring products and pack sizes are appropriate for local demand has never been more important.

For the online channel, suppliers should make sure products are marketed effectively, with high quality imagery and product information becoming the standard. Suppliers should also consider how to innovate in this competitive area. For example, in fashion video has come to play a large part in helping shoppers make online purchasing decisions; could it be used in online food and grocery shopping too?

Our UK grocery market and channel forecasts report provides a unique insight into the future of the market and individual channels, and is exclusively available to subscribers of our Retail Analysis service. View the full report here.

If you are interested in finding out more about Retail Analysis you can contact us on [email protected]

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Nick Gladding

Nick Gladding

Senior Business Analyst