The changing nature of food retailing was laid bare on Thursday with lower than expected UK sales growth at Tesco Plc and Amazon.com Inc. expanding its partnership with the smaller British chain Wm Morrison Supermarkets Plc.
Amazon’s agreement with Morrisons, while still fairly small right now, shows the ambitions of the online giant toward the UK, already one of the world’s most competitive retail sectors. That will strike fear into the hearts of supermarket behemoths such as Tesco, Britain’s grocery leader.
Tesco has been trying to bolster its defences, and a slowdown in growth in the three months to May 25 shouldn’t be too surprising. All retailers face extremely difficult comparisons with the same period last year, when Britain was basking in sunny weather and enjoying a Royal Wedding.
The company’s CEO Dave Lewis remains on course to hit his target for an operating margin of between 3.5-4 per cent by February next year.
Still, the first quarter slowdown doesn’t exactly inspire confidence about what happens once that margin target is reached. The company updates the City next week on how it can find ways to bolster sales and profit. It’s staying tight-lipped for now, but making more of its use of customer data — including through its Clubcard loyalty scheme — might be on the agenda.
Lewis has talked before about developing the property around its stores. That could become a bigger part of cash flow too.
Tesco could also work more closely with Booker Group Ltd, a recently acquired food wholesaler. It’s experimenting already with putting cash-and-carry outlets in Tesco stores and introducing dedicated bulk-buy areas, with one eye on becoming Britain’s answer to America’s Costco Wholesale Corp. Wisely, it has also set up a purchasing alliance with Carrefour SA, the French supermarket chain.
But as the quarter showed, life isn’t getting any easier for Tesco. Aldi and Lidl, the cut-throat German discount grocers, are still powering ahead in Britain, putting enormous pressure on the traditional giants.
That makes Amazon’s advances all the more fraught. Morrisons, the UK’s fourth-biggest supermarket group, said on Thursday that it was expanding its super-fast grocery delivery service for Amazon customers. Nine regions in England and Scotland will now offer this, up from four. The aim is for nationwide coverage.
The rapid roll-out of the Amazon partnership has been facilitated by another smart move by Morrison’s chief executive David Potts, who started his supermarket career on the shop floor. He has negotiated an end to his company’s exclusive relationship with Ocado Group Plc, the specialist online grocer. That has opened the door to closer ties with Amazon.
Beset by price-slashing German rivals on one side and savvy online operators on the other, Tesco and its ilk are going to have to work hard to keep food in their investors’ mouths.