Tougher competition lies ahead food retail industry

The Swedish food retail market may be cooling off towards the end of the year. ABG Sundal Collier (“ABGSC”) predicts slower growth in fourth quarter and flat market development in 2021 in a recent research report. COVID-19 has fueled significant growth in the online channel throughout the year. The question is how that will affect margins down the road. Customers can access the full report here.
The Swedish food retail market has seen a significant boost over the year. Consumers started to hoard at the end of February due to COVID-19, and March grew by a staggering 13 per cent, resulting in 9 per cent growth for the first quarter.
The second quarter followed with continued strong volume growth while food price inflation accelerated. Supported by the staycation and working from home trends, the summer months held up well. ABGSC expects the third quarter to show continued growth. Looking ahead, we expect a gradual slowdown for the last quarter.
After losing market share to competitors for eight consecutive months, the Swedish ICA stores outpaced the market in August and showed continuous momentum in September.
“We believe that the market could become increasingly competitive looking ahead. There are two main reasons for this: first, a sluggish macro environment could play into the hands of discount players like Lidl and Willys. Second, ICA looks set to accelerate its growth focus based on its recent communications”, says Fredrik Ivarsson, analyst at ABGSC.
According to ABGSC’s research, COVID-19 has fueled significant growth in the online channel. Online sales accelerated from already high levels over the summer months, reaching a staggering +165 per cent in July. According to figures from Postnord, close to 20 per cent of all consumers did their grocery shopping online at least once during Q2 of 2020. The corresponding figure for Q2 of 2019 was 5 per cent.
“The initial entry barrier of setting up an account has been overcome, and we believe that many of the new customers are likely to keep using the service beyond COVID-19 as well”, says Fredrik Ivarsson.
ABGSC expects continued strong online growth but foresees pressure on margins.
– We expects the online food retail market to grow by 78 per cent in 2020 versus 22 per cent in 2019. Since the online channel is a margin-dilutive business model, this could imply some headwinds in terms of profits for food retail players, says Fredrik Ivarsson.
By 2025, ABGSC expects the online channel to generate close to 10 per cent of the total market, implying that brick-and-mortar stores will remain the bread and butter of food retail for many years.
In terms of sector valuation, Fredrik Ivarsson at ABGSC finds it interesting that Swedish food retailers are trading at a premium to their Europeans peers of about 40 per cent compared to a historical premium of about 20 per cent.  However, the premium to OMXS30 has decreased, and is now closer to its average level.