EU’s Supermarkets Don Clothes To Boost Margins

Discount supermarkets in Europe are findings it increasingly difficult to compete on the food products they sell, so they’re turning their attention to another, more profitable consumer staple: clothing. And a price war appears to be underway that is affecting margins there as well.

Non-food items such as clothing typically generate only 20 percent to 30 percent of a supermarket’s sales per square foot. However, the gross profit margin from such sales can be 40 percent to 50 percent, double that of groceries, according to the Financial Times.

A recent Times article notes that grocers with hypermarkets, including Tesco and France’s Carrefour, have faced particular margin difficulty from a reduction in nonfood sales. That’s because of a movement toward more local shopping and a migration to online specialty retailers, especially in electronics.

But clothing shows promise, as it not only has a greater profit margin than food, but its sales at such stores also are rising quickly in the region. Clothing sales rose 30 percent between 2008 and 2013 at supermarket groups, according to retail consultancy Conlumino.

“Apparel is growing rapidly in UK food retail. It’s one of the few bright spots in non-food for the Big Three supermarkets,” analysts at Morgan Stanley said in a recent note, cited by the Times. As a result, competition is up in the sector.

For example, the article noted, Germany’s Lidl Aldi have shaken up the UK market, putting pressure on companies such as Tesco, which recently entered the country’s fashion market.

Seasonal trends have been a particular target for supermarkets selling clothes. School sweatshirts, for example, are selling for as low as £2 (US$2.63) as they compete in the UK’s £1.4 billion “back to school” market, the Times reported. Retailer Asda also is offering sweatshirts for only £2 and in some areas, and Tesco is offering blazers embroidered with a school badge for only £16, the Times report noted.

Tesco is looking to defend its position as the market’s second-largest grocer selling clothes, after Asda. Tesco has managed to expand its share of the clothing market, rising from 1.8 percent in 2009 to 2.3 percent last year, according to market research group Euromonitor, driven by a relaunch of its F&F clothing brand. By comparison, Asda maintained a 5.6 percent share of overall clothing and footwear sales with its George brand, the Times reported.

With a shift to discount rivals and local stores forcing big chains to refocus, the transformation of the food retail industry is the biggest since the advent of the supermarket, the publication noted.

Tesco revamped its clothing range last year, which led to higher sales, according to Morgan Stanley. “However, stagnation this year, just as Tesco says it has completed the revamp of this category and is now focusing on other non-food categories, is more worrying, in our view, given its potential upside,” they said.

The increasingly competitive war on grocery prices has drawn much of the blame a recent profit warning from Tesco. But the retailer also faces a growing competitive threat to clothing sales as well. Protecting Tesco’s position in clothing will be one of many challenges facing new CEO David Lewis, who took over his new role on Monday (Sept. 1).

“One reason Tesco has found it difficult to compete on price overall has been because it has been inhibited by the underperformance of its non-food offering,” says Tony Shiret, analyst at Espirito Santo, said in the Times article. “Its clothing offer has not moved on to match developments in that market.”