Disruption to Accelerate UK Retail Evolution

As progressions take place in retail digitalisation, the UK has long been at the forefront in Europe. Its online retail sales share, currently at 17%, is the highest in the region. Mobile ownership and internet penetration is higher than in many other developed Western markets.

Factors causing the disruption in the British retail industry include an erosion of the middle class; digital transformation and automation, and Brexit. While disruptive now and causing short-term uncertainty, these drivers will accelerate innovation in the UK ahead of the rest of Europe. CPG suppliers need to ensure they stay on top of a rapidly transforming retail landscape.

Britain already leads the way for digital retail

Automation initiatives have become more advanced, like Ocado’s fully automated warehouse. This driver will prompt future retail and supply chain disruption as Brexit heightens cost pressures. The UK was also the first market to introduce self-checkouts on a wide scale 10 years ago. These drivers will prompt future retail and supply chain disruption as Brexit heightens cost pressures.

Middle-class purchasing power erodes

The erosion of Britain’s middle class is underway and will be further fueled by multiple factors. As highlighted in our report Future Retail Disruption – UK STEIP 2018, societal ageing will make income redistribution necessary, eating into the purchasing power of both the working population and pensioners. Digital transformation of labour will potentially make millions redundant across all income strata – including retail and allied sectors like logistics, agriculture, food service and CPG manufacturing.

Brexit to exert short-term pressure on the retail sector

The UK will leave the European Union in March 2019, with potential disruption likely to be mitigated by a transition period extending to end-2020. A new immigration regime coming into force will limit the supply of low-cost labour from EU countries. To combat related cost pressures that will affect the FMCG, agriculture, retail and foodservice sectors, a new wave of automation and digitisation must be expected across the food industry. Insecurity regarding the outcome of Brexit has also weakened sterling and driven up prices for imported goods, including food and energy. To combat inflationary pressures, interest rates may be raised significantly. This would impact the home-owning middle class, reinforcing ongoing erosion of this socio-demographic’s purchasing power.

Should retailers and CPGs invest in the UK?

Brexit continues to generate a high degree of uncertainty for suppliers as they are forced to prepare for a diverse set of scenarios.

In the worst-case scenario, Britain will revert back to WTO rules with the EU, its single biggest trading partner, with a risk of import duties and delayed cross-border traffic. Suppliers will need to procure locally or develop British production facilities to mitigate international trade risks. Selling into the UK from overseas could force CPGs to re-evaluate their portfolio brand positioning and pricing, given the challenges to profitability.

A less likely, but best-case scenario, is that the UK and EU agrees on a smooth transition with uninterrupted cross-border trade. This would also reduce inflationary pressure by causing the pound to recover.

The UK remains a populous market with high spending levels. It offers an opportunity for retailers and suppliers to learn how to optimise omnichannel or digital retail operations in an already highly digitised market, a transition that other European markets will eventually experience.

Digital retail capabilities are table stakes in the UK

E-grocery is rapidly gaining share in the UK, with 5.5% of food retail sales generated online (ahead of France with 4.5% with other European markets significantly further behind e.g. Germany where it is 1%). The dominant model is home delivery, with Tesco.com, Asda.com and Sainsbury’s.co.uk and Ocado all owning their own truck fleets. However, a recent new dynamic has been added by Amazon’s entry with Fresh, which has seen established players are reacting to offer more in the way of attractive initiatives.

Suppliers need to be sure their brands feature on digital shelves. Brand visibility, particularly in the context of voice ordering, is a key concern. To remain uppermost in consumers’ minds, brands need to make sure to correctly target their D2C marketing spend.

How can we help

If you’re a retailer or CPG brand looking to invest in the UK, please contact us by completing the “Contact us” form.

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