News Analysis: Will food vanish from the shelves?

With supermarkets clamouring for non-food lines, FMCG companies fear they will be marginalised. It is not often that a food manufacturer will publicly criticise the supermarkets, preferring not to bite the hand that feeds. So it was all the more significant last month when sales and marketing directors from Kraft Foods and United Biscuits used the Institute of Grocery Distribution (IGD) conference to highlight food companies' worries that their products could be marginalised by retailers' hunger for non-food items.

According to an IGD report, 11% of UK shoppers visit supermarkets to buy non-grocery items such as cosmetics, clothes, homeware and electrical goods. ACNielsen Scantrack found that non-food was the fastest-growing category in the £67bn spent at UK grocery multiples last year, with 15% annual growth.

For supermarkets, the appeal is simple: non-food items offer significantly higher profit margins than food, where fierce price competition has slashed profits to a minimum. Supermarkets typically make margins of 6% on food, whereas clothing and homeware can bring in as much as 15%.

Most of the major supermarkets are enthusiastically embracing the charge into non-food products (see box). Sainsbury's is a notable exception, having recently announced that its recovery plan will focus on a back-to-basics approach, with non-food expansion limited to its 157 biggest stores.

But, as Gavin Rothwell, senior retail analyst at Verdict Research, points out: 'Sainsbury has a target of growing sales by £2.5bn over the next three years, and it wants £700m to come from non-food, so it must still be high up the agenda.'

Marginalised traffic generator

Considering that non-food expansion plans cannot be catered for solely by building bigger stores, grocery brand owners worry that something has to give - they fear it will be them. 'I do not want to see food reduced to a traffic generator for retailers,' says Steve Newiss, vice-president for global customers at Kraft Foods International. 'I fear that the growth in non-food is opening the way for food to become marginalised and a means of selling other products.'

Rothwell argues that retailers are giving less space to non-food items than the rise in sales suggests - 'sales are growing faster than space' - but he agrees there is more pressure on FMCG manufacturers to have strongly performing lines.

Though this pressure has always been a feature of the manufacturer/retailer relationship, retailers are now far more motivated to remove an underperforming food brand if they know it will make room for a higher-margin non-food product. This applies particularly to the traditional, 'ambient' grocery market of tinned, dried products, where it is harder to build premium appeal and add value. The result is more emphasis on product innovation and value.

Newiss says Kraft Foods has been focusing more on innovative products and packaging to ensure its brands do not fall victim to line rationalisation.

For example, it has worked on the taste of its Philadelphia brand, supported by marketing designed to drive home the message. Kraft has also invested in innovative packaging, such as resealable packs for chocolate.

Procter & Gamble is similarly looking at ways of creating extra value.

Gary Coombe, P&G's general manager for customer business development, thinks the 'essential' FMCG lines won't be cut, but '(supermarkets) can kick out tertiary brands, stop promoting us and cut the number of bays they sell us from. We are only in danger if we do nothing.'

Collaborative R&D

P&G collaborates with retailers on new products. Retaining the core R&D in-house, it involves retailers early in the development of a product, winning their support in a way that often helps achieve more shelf space.

P&G's success in baby products is a case in point. It argues that its toddler wipe, Kandoo, and the Baby Stages of Development range of nappies have helped the babycare category become less commoditised and gain more shelf space. Coombe cites Fairy Power Spray dishwasher fluid and Flash Power Mop as two other innovations that have breathed life into 'sleepy' categories.

Supermarkets themselves are keen to quell the fears of FMCG companies.

A spokesman for Waitrose says that, in the 19 stores it bought from Morrisons this year, it has increased the number of product lines just by making the space work more efficiently.

'It's not a question of us suddenly wanting radios instead of eggs,' explains the Waitrose spokesperson. 'We do not want to compromise our food offer to customers or our relationship with suppliers. There is no need for anyone to feel threatened by non-food, because there is ample room for both.'

Ultimately, FMCG goods are not going to vanish off the shelves to be replaced by DVDs and barbecues; retailers know their core grocery offers are what drives people into supermarkets. As Coombe says: 'Supermarkets also know that if they overdo the non-food side, they can easily lose customers.

'It is not as if we are on a train that we can't stop,' Coombe adds. 'Supermarkets will always need a strong grocery selection and big brands will always be part of that.'

DATA FILE - NON-FOOD STRATEGIES

Tesco

With almost half of its customers buying non-food items regularly, Tesco is a major player in almost every high-street retail category, from fashion to CDs. Its half-year results in September showed non-food sales up 17%, entertainment up 26% and clothing 39%. It plans to extend its larger stores into Extra formats to sell more non-food items.

Sainsbury's

As the key plank of its recovery plan is food, Sainsbury's only plans to offer non-food items in the biggest of its 157 stores. Its home and kitchenware range, By, launched last month, while casual clothing brand Tu debuted in September.

Asda

Asda's £1bn clothing brand George has helped it overtake Marks & Spencer to become the UK's biggest clothes retailer, prompting it to open five standalone George outlets. Asda also opened its first, dedicated non-food shop, Asda Living, in Walsall last month. A second outlet, in Yorkshire, is planned for next spring.

Waitrose

The supermarket has launched five Waitrose Food and Home stores. It is also offering non-food ranges at some of the bigger stores it acquired from Morrisons in Hull, Sheffield, Wolverhampton and Lincoln.

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