27th jan 2017
The long-standing puzzle remains unso... read more »
The long-standing puzzle remains unso... read more »
According to a recent forecast by IGD... read more »
In 2016, online grocery is worth £10.... read more »
The long-standing puzzle remains unsolved in a year of many changes. In Quarter 2 (2016), we witnessed the collapse of the high street stalwart, British Home Stores, due to a series of leadership failures resulting in 11,000 job losses. Also important to note is a great deal of change within the labour market, with the introduction of an increased NLW which is forecast to directly benefit 2.7 million people. And then there was the call for Brexit.
A Turbulent Time.
Many argue that the events prior to and following the Brexit vote have cast a shadow over the future of the UK, while productivity remains well below fellow G7 advanced economies. Labour Productivity – the ONS Q2 Bulletin brought news of 0.6% growth in Output per Hour since Quarter 1. For the first time since 2008, UK productivity had returned to pre-downturn levels. In the same breath, the Labour Force Survey reported an increase in the number of workers (0.5%), and the number of jobs (0.6%) while in November 2016 the UK reached its lowest unemployment rate for 11 years at 4.8%.
Preliminary estimates suggest that between October and December 2016, UK GDP increased by 0.6% on Quarter 3. Although growth appears to be slowing, estimates suggest that GDP grew by 2.0% overall during 2016. Services were a key contributor with an estimated GDP growth of 2.8% in 2016 with retail trade contributing an increase of 5.0%. Following the vote for Brexit, concerns were raised in anticipation of a decline in economic growth – so far at least, this projection has not yet been realised. However, Britain is facing a challenging time ahead while preparing for a future outside of the European Union. Prime Minister Theresa May is hoping to trigger Article 50 as soon as March 2017 with proposed plans to change the existing free movement rules – how will this impact UK productivity?
Skill Matches – missing piece of the productivity puzzle?
OECD stats suggest that the UK has a high rate of mismatch between existing skills and those required for the job. This macro outlook is propagated from the micro level – we see this lack of skills matching consistently across retailers estates. OECD estimates that as many as 24% of workers in the UK have mismatched skills which points towards the need to align education with skills in demand. One industry keen to improve its image is road haulage. A report from the Chartered Institute for Logistics and Transport suggests that the average age of UK HGV licensed drivers has reached 57 years old. While 85% of goods consumed in the UK are moved by road, both service and manufacturing industries in particular face a growing challenge to deliver customer excellence as they strive to deliver to even stricter deadlines. The proposal to implement a work permit system could impact the industry heavily as according to the FTA, nearly 10% of HGV drivers currently employed in the UK are EU nationals.
A Living Wage.
As highlighted earlier, the NLW was implemented across the UK on the 1st April 2016, bringing the minimum wage for 25+ year olds to £7.20ph, with incremental increases projected to take the NLW beyond £9ph over the next 3 years. In the autumn 2015 CIPD Labour Market Outlooks Survey, a large proportion of retailers expected NLW to greatly impact their staffing costs, in turn making a focus on productivity more important. Despite the NLW being solely applicable to those aged 25+, latest figures suggest that between 10-15% employees aged 16-24 are paid a wage equivalent to the NLW. In April 2017 the NLW will be raised to £7.50, an increase of 30 pence since the same time last year, likely to be another headache for retailers while drawing up the budgets for next year.
As a result of such changes, the cost of labour has increased, and is set to increase even further. Q2 saw Output per Worker grow by 0.2% on the quarter, while Output per Job remained flat due to a reduction in average hours worked. A marginal increase in Output per Hour (0.6% set against a rise of 1.2% (vs. Q1) whole economy unit labour costs should be a cause for concern for many employers. These figures represent labour costs outgrowing productivity – but why?
How does the UK compare?
Many suggest that meagre wages and employment instability are to blame. The concept of ‘flexible working’ has been floating around for several years now, billed as a productivity silver bullet by some, the aim of recruiting and retaining the right people for the right amount of time seems like a great value means of achieving business objectives, however the management overhead to deliver this approach effectively is consistently underestimated.
This approach only turns out well if the business is living it, fully flexible employees are likely to be less engaged meaning it’s up to the business, specifically management, at every level, to ensure that there isn’t a counter-productive impact from dis-engaged colleagues.
SWL have seen best intentions in this area fail time and again as management priorities change; this always impacts productivity and based on this the trend away from full flex and zero hours is a wise one. Improved security for colleagues improves engagement (which SWL treat as a metric built from a basket of measures), which in turn improves businesses overall productivity.
Businesses across Sweden have reduced the working day from 8 to 6 hours though offering the same wage, the benefits gained were considerable including a reduction in sick leave and improved employee wellbeing. Toyota centres in Gothenburg, Sweden, have been operating a 6 hour working day for over 13 years, delivering profit increases and lower turnover rates, while this approach is difficult to implement in retail, especially in light of NLW, it does show the positive impact of more engaged workers on profits.
Overworked and under-performing?
Interestingly, when reviewing hours worked in the UK against fellow G7 countries, working more hours than our counterparts in France and Germany makes little positive difference to the productivity gap. The UK has slightly narrowed the productivity margin between the UK, Italy, France, Germany and Canada, though has also allowed Japan to gain further ground. GDP per Hour worked suggests an 18 percentage point negative difference between UK and G7 economies. Productivity is a serious item on the country’s to-do-list and should be for every business.
What does all of this mean for retailers?
Retailers face a period of uncertainty with projected rising labour costs as well as increasing supplier costs. The BRC have warned that a combination of a weaker pound, rising input costs alongside the rising NLW could bring a wealth of uncertainty to retailers. On the other hand, as a Hargreaves Lansdown Analyst suggested recently, the weakness of sterling can offer an opportunity for visitors to take advantage of the deflated price following a recent uplift in UK sales at Burberry. As political and economic uncertainties capture the minds of many retail consumers, retailers must work hard to offer customers the best possible experience.
Robust controls will support the retailer to assure profitability. While sales are increasing across most retail verticals, maintaining profitability is increasingly difficult. The British Retail Consortium reported that the final week of 2016 brought a much needed gift of a solid finish after a roller-coaster year. While British retail experienced slower total growth in 2016 (1.2%) than in 2015 (1.8%) Christmas witnessed much stronger performance than anticipated. With FY17/18 just around the corner, there is no time like the present to make space for productivity, both in the boardroom and on the shop floor.
WHAT WE KNOW FOR SURE AT SWL…
Is that robust control is pivotal in running a successful retail business. By equipping your senior team vital actionable intelligence from an SWL Productivity HealthCheck the business can ‘act on fact’ ensuring the right decisions are made to improve productivity. SWL then underpins these learnings and process improvements with the correct tools for the job, SWL’s productivity suite covers from labour budgeting to performance monitoring ensuring that improvements are long lived and repeatable.
According to a recent forecast by IGD, Asia is the fastest growing grocery market across the world. In fact, the forecast anticipates that the Asian grocery market is likely to experience sales which exceed those of North America and Europe combined over the next 5 years. With a 6.3% annual compound growth rate (CAGR), the market is forecast to reach $1073bn by 2021. Of that total, India is anticipated to account for $735bn, with a 9.7% CAGR. However, as with all forecasts, any international political or economic instability is likely to render these estimations unreliable.
A Growing Market. Whilst UK grocers consider a future outside of the EU, India may be wise to look closer to home to find challenges to their current grocery market growth. The recent (rather swift) decision to remove Rs 1000 and Rs 500 from circulation has caused a myriad of troubles throughout the FMCG and retail sectors, not to mention society as a whole. A whopping 92% of retailers are ‘unorganised’. Locally known as ‘kiranas’ or ‘mom-and-pop’ stores, traditional grocery retailers are the preferred choice for the majority of shoppers. Often, these retailers trade in cash only, which has undoubtedly had a snowball effect upon trade. Every tier of the FMCG sector has felt the strain:
Demonetisation Drive. Cash accounts for 90% of all monetary transactions, leading to a great deal of frustration and anger following the overnight cancellation of Rs 1000 and Rs 500 notes, branding 86% of all cash in circulation as non-legal tender. Following this rapid implementation, India’s Finance Minister has now announced plans to install two point of sale machines (Allowing electronic payment) in 100,000 villages in a so-called ‘demonetisation drive’. Given that the rural, agricultural poor have been hardest hit by withdrawal of notes, strain will be placed on the already sparsely spread banking services. Given that approximately 90% of the workforce is part of the unorganised sector, and cash is often the only method of remuneration, the government are keen to regain lost monies in form of taxes, though many have criticised the recent action.
PMJDY. According to statistics published by the Reserve Bank of India, there are over 1,440 million deposit bank accounts open in India. The government launched the financial inclusion initiative, ‘People’s Wealth Scheme’ in 2014 with the aim of providing 75 million unbanked Indians with access to financial services. The latest progress report released by the India Ministry of Finance suggests that over 257 million bank accounts have been opened since the start of the scheme. Independent research by FII (Financial Inclusion Insights) suggests that only 42% of bank accounts are active (used within 90 days), which places a cloud over the proclaimed success of the scheme.
Whilst the government is celebrating the success of the scheme, there is widespread concern around the volume of zero balance accounts and likely account duplication. With a rural population of 881 million which accounts for 67% of the population it is hardly surprising that bank account holders are most likely to hail from rural households. However, their access to banking services may be much less simple than their urban counterparts.
A Cashless Society. As introduced earlier, many small traders are complaining of exceptionally poor sales due to a large proportion of individuals not having the cash to pay for daily necessities. While a cashless society is highly desirable target for the government, it is not entirely practicable given the current infrastructure. Also lacking in some areas of India is an adequate level of financial literacy as well as cyber security in order to raise confidence in banking and online financial activities. As many as 29% of Indians (according to FII) are financially illiterate, which suggests a cause for concern moving into a cashless society. Also astounding is that 21.9% (Census, 2011) of the population was deemed to be below the national poverty line, indicating a lack of wealth despite implementation of improved social security benefits and uplifted wages.
In a recent government circular, it was suggested that Goa would be the first state to go ‘cashless’, demanding each and every vendor to offer digital payment options for customer transactions. However, many argue that the wide-scale mistrust in digital technology, lack of resources, ability and stable infrastructure will create large pitfalls within the proposed plans. Prime Minister Modi is calling for young people to support the proposal by teaching families how to use digital payment and banking technologies. State-wide initiatives are being launched to teach the public how to use digital cards and banking technology. As the state of Goa has a population of 1.8 million, this will be no mean feat to achieve prior to elections to be held in early 2017 (which is the proposed plan of the government).
An Unstoppable Force? India has it all to play for as the third largest grocery market, currently placed between USA and Brazil. The grocery market is known for its adaptability. Innovation may be called upon by some to minimize the impact of the coming changes to retail businesses, large and small. Though perhaps the traditional grocers, offering an unrivalled service to their familiar customers are worst placed given their buying and selling options are further stifled. Until new notes enter circulation, many traditional grocers are turning to increasing customer credit in order to make a sale, though recovering these debts is proving to be difficult.
Who Are The Winners? Arguably, modern retailers already equipped with the necessary POS systems are well positioned to continue to trade during an otherwise inhibiting period. Forecast to grow approximately 20% in the next year, the modern retailer may be wise to capitalise on the opportunity to gain an advantage over their traditional counterparts. Well-equipped modern retailers are likely to escape the punitive action promised by the government for non-compliance; however, with only 2% grocery market share at present, modern retail has a steep mountain to climb.
WHAT WE KNOW FOR SURE AT SWL… is that beyond the current upheaval, as wages are increasing in India, productivity becomes vital. We recognise that every retailer is unique, influenced by a variety of factors, both internal and external. SWL’s AS IS, TO BE approach enables our productivity experts to collaborate with the retailer to establish a bespoke productivity solution, capable of delivering the specified business benefit.
From a retail environment common in India with no formal process and a rising wage challenge to a UK based retailer attempting to combat the increase in National Living Wage SWL’s offer will be fit for purpose and deliver benefit.
SWL offer a range of bespoke productivity solutions, including the SWL Productivity Health Check to understand your current productivity health and identify opportunities for improvement in order to support you in line with your strategy to become the best you can be.
In 2016, online grocery is worth £10.5bn, a service now operated by all the leading retailers in order to further expand their reach. By 2021, IGD forecast the online grocery channel to be worth £17.6bn, generating 9% of all grocery sales. We have previously explored the changes in shopper trends, with customers seeking convenience and value – online grocery operators are working tirelessly to develop the perfect shopping solution to meet the changing customer demands.
The Digital World
The rapid development of new technology has allowed and encouraged grocery retailers to provide a new channel for shoppers where everything is accessible while on the move. Much has changed since the first implementation of grocery e-commerce in 1997 by Webvan, an American company. The company expanded their services into new markets prior to proving its success in the first, leading to a rapid decline due to inexperience and lack of foundation. This swiftly led to the company filing for bankruptcy in 2001. In fact, in 1997, the internet was used by only 22.1% of adults in the US, whereas in 2014, the percentage had jumped to 87.4% – many argue that the market was far from the maturity required to warrant such a sharp expansion. Retailers across the globe now have a much bigger target audience than 20 years ago due to the affordability of computing devices and improved access to the internet.
Convenience – The Online Driver
Online grocery retailers continue to offer increasingly convenient services including home delivery, Click & Collect from store or designated locations (e.g. Tube stations). In an attempt to fend off competition from rivals, grocery retailers are investing heavily in their online offer by optimising their web customer journey. Retailers, such as Tesco, are starting to consolidate their websites onto a single platform to improve navigation and sustainability, expelling unnecessary costs and reinvesting their savings.
Due to growing demand and intensifying competition, retailers are seeking more profitable solutions to deliver the best possible service. Ocado operate a very different model than that of the conventional grocery retailer. Operating an online-only grocery store offering as many as 47,000 lines including private label goods having agreed a sourcing license with Waitrose, Ocado can essentially ‘cut out the middle man’ by providing delivery from a central fulfilment centre using automated systems alongside a team of targeted pickers. This particular model offers the framework to operate extremely efficiently with enhanced picking targets, lower risk of error and minimal distraction from task – an attractive proposition for retailers, especially new entrants to the online market, Morrisons.
This is a world away from what can be observed in UK supermarkets on a daily basis, though we are now seeing the growth of “dark stores”, especially in heavily populated areas, such as London. Sainsbury’s aim to open their first online service centre in autumn this year in the capital city, employing up to 900 staff by 2020 with capacity to deliver 25,000 orders per week. Sainsbury’s hope that this will reduce pressure on stores and also support their venture into a same-day delivery or collection offer which they are currently trialling in a small selection of stores. Morrisons on the other hand have chosen to use an Ocado platform offering end to end service management, agreeing a 25 year deal. This is an attractive offer for new players in the market as Amazon begins deliveries of fresh products across the UK in partnership with Morrisons who will make hundreds of products from their ambient, fresh and frozen ranges available to customers of Amazon Prime Now delivery service, Amazon Fresh and Amazon Pantry.
The Cost of Transformation
We have heard much about the cost savings with regards to labour and efficiency, but what about the impact on the traditional shopper who performs the task of in-store shopping? Retail has changed dramatically in the last 70 years. The transition from counter service to self-service in grocery stores was a slow burner in Britain – the nature of customer service was changing, causing a big divide in opinion. Retailers are now facing a much more rapid transition towards a growing population of home shoppers which demands industry wide change.
Within supermarkets operating the online delivery service, in-store shoppers may sometimes feel the aisles narrowing due to congestion of online grocery pickers and replenishment colleagues. Customers shopping in store have a long list of reasons for doing so; in their publication ‘The Future of Grocery (April 2015), Nielsen suggest that “E-commerce is set to grow, but brick-and-mortar will still dominate” the grocery retail industry. They suggest that only a physical store can help a customer fulfil immediate shopping needs without facing delivery costs. Nielsen also suggest that in-store atmosphere also offers a point of difference; the scent of freshly baked bread and patisseries as well as the opportunity to see and feel vibrant colours and textures of fresh produce. It is these unique factors which retailers must bear in mind when upscaling their online service and delivering from store.
Many stores are equipped to complete a large majority of their picking prior to store opening, however, this does not seem to be an industry wide target. A call to stores belonging to each of the leading retailers established that picking start times vary significantly. Sainsbury’s appear to be the most in-store customer friendly with regards to start time, having contracted all online shoppers to a 4am start Monday-Saturday, 5am on a Sunday. This means prior to opening for trade, the vast majority of online grocery picking will have already been completed, alleviating a battle for space in the aisles. One Asda store suggested a variation in start times between 4am, 5am and 6am – could customers face a variable space race depending on which time they shop and on which day? A similar call to a Waitrose store established a 6am start for picking, offering their personal shoppers just two hours of empty aisles before store opening. Tesco also operate from 6am, with a 3.75 hour shift to 9:45. Arguably, Morrisons have the best possible solution to minimising or removing the customer impact of in-store picking by operating from central fulfilment centres in partnership with Ocado, although this does come at a cost; in 2015 the Morrisons agreement contributed £73.9m of Ocado’s revenue in fees and recharges.
Nº 2 Worldwide
Could working smarter be the answer to reducing the impact of online grocery picking to in-store customers? With an astounding increase predicted in the second fastest channel for growth, grocery retailers need to ensure they are equipped to manage an increase in orders and meeting more acute customer demands including swifter delivery lead times. The UK is currently the second biggest market for online groceries and IGD (2015) predict that in 2020 the UK will hold second place by adding 68.3% to a new value of £17.6bn. While big-box retailers decide how to use ‘dead’ space in their stores, it is surely worth considering what the next 5-10 years will bring as online grocery builds an even larger customer base, placing more pressure on the grocery retailer to deliver quality service with a lightning speed turnaround. Physical changes such as the widening of aisles or HR changes such as reviewing contracted hours to complete the workload outside of trading hours, could bring a number of benefits to both online and in-store customers. The in-store purveyor of fine foods and easily influenced, time-rich browsers are crucial to the success of the supermarket and therefore must not be ignored.
WHAT WE KNOW FOR SURE AT SWL is that the demand for Omni-channel retailing is of utmost importance for grocery retailers in this rapidly adapting market. A customer’s shopping experience should be seamless, whether visiting a store in person or completing a grocery order on a mobile device or PC – all elements of service delivery must uphold the brand and brand values.
SWL’s CLEARMATCH enables managers to achieve contract optimisation and recruit to perfection, ensuring your customers both at home and in store enjoy a positive journey from basket to fridge. Rather than approaching change with your basket half empty, ensure you are equipped with qualitative customer insight – ask the experts with SWL’s CCE – Continuous Customer Engagement.