2022: The retail year in review, part 2
“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
The year 2022 proved to be very different from what was expected a year ago. The looming threat of war was probably clear to many military analysts, but few of us in the business community believed in that possibility. Let alone understood the potential implications of that. Turned out that the war had implications in many areas, including retailing. Here are five topics that stand out from the eventful year 2022.
#1 Return of the disciplined growth?
One could say that year 2022 was a year of disciplined growth companies. Companies with straightforward business models (often with strong credentials on low prices) were more successful than their peers.
One aspect of the clarity of the business model is that the companies have been relatively conservative about growth, channels and store concepts. Companies like Aldi, Lidl, Costco, IKEA, Inditex, Walmart, and TJX are clear on what they are good at and execute that very well in multiple markets.
The other aspect to discplined growth is that they don’t aspire to fast growth in itself. They do grow rapidly, but it is done when the company is ready for it. All of the above mentioned companies are decades old and have grown steadily for decades now. As they have matured, they have reached a scale where the growth is big in absolute numbers. But the years have given them experience of handling the growth.
These companies have been building on their strengths one step at a time. This disciplined growth reduces many of the unnecessary mistakes that are made during a rapid growth phase. Especially the quick delivery grocery players have encountered this during 2022.
#2 Power of external shocks vs incremental customer adoption
External shocks driving online share up and down in the UK (Source: ONS)
The years 2020 and 2021 have shown how critical external shocks are to the changes in an industry.
Over the last decade, we have been following how online channels have been growing within retailing. This growth has been sluggish because growth through customer adoption is often relatively incremental. However, the last couple of years have shown us how dramatic change can happen when an external shock is given to the system.
The pandemic influenced online retailing heavily in almost all sectors and markets in the western economies. Much of the online adoption has been reversed after the pandemic, but many online markets are still on a raised plateau from where they will start growing again.
On the other hand, the war in Ukraine propelled the price-lead companies to accelerated growth rates not seen before. This has led to rapid market share growth for German discounters. However, this level of quick acceleration would not have been possible without the more incremental growth years before the external shock.
Consumer behaviour changes do matter, but they influence much more slowly. Watch out for (coming) external shocks related to sustainability and the health crisis.
In 2020 & 2021, the successful retailers were mainly big non-food retailers, almost all grocers (discounters performing poorly), online, especially online grocery... However, things changed quite dramatically in 2022.
The most important elements of 2022 can be categorised into three main areas. 
#3 Price, price, price
As mentioned above, the price has been the dominant determinant of success in the retail landscape of 2022. The retailers with structural advantages to offer lower prices than competitors have been winning.
With inflation running wild, it is natural that the retailers with the lowest prices have grown better than others. Besides the German food discounters, Willy's in Sweden has also been a spectacular success.
#4 Inventory problems
On top of the price pressures, the end of the pandemic restrictions, along with its influence on spending patterns, has created significant headaches for some retailers. Notably, non-food retailers have struggled with rapidly changing supply chain patterns.
During the pandemic, the big topic was to ensure the reliable and consistent supply of goods (especially home and home office products) to western markets. Rather rapidly during 2021 and early 2022, the spending patterns changed as customers were no longer tied to their homes.
This led to significant inventories for retailers. Especially the non-food retailers (such as Target, Nike, Tokmanni, and Verkkokauppa.com...) struggled as products started to pile up in the warehouses and stores.
Some retailers selected a strategy of waiting patiently to clear the inventories without big-bang promotions. On the other hand, Target decided to take drastic action and clear inadequate inventory out before the Christmas season. That did not go well with Wall Street. Target's share price plummeted by on the day of the announcement (18.5.2022) by -25% (LINK). It remains to be seen how Target succeeded in the fourth quarter of 2022.
#5 Changing online (grocery) landscape: valuations plummeting
As mentioned in the previous post, the online grocery market has seen dramatic changes during 2022. The quick commerce sector has been especially hard hit.
Online groceries. Also saw declining revenue shares in many countries, such as the UK, Sweden, and Finland.
This was apparently because customers wanted to go back to the stores to buy their groceries (especially elderly customers who were forced to buy online during the pandemic)
The decline in the share of online groceries was because the price lead discounters grew more rapidly than the market. They have yet to traditionally be active in building online services.
The decline in the share of groceries going online has led to radical reductions in valuations for many online grocery players. The declining valuations of Ocado were illustrated in the previous post (link).
Also, Norwegian Oda and especially Mathem (link) and Instacart have seen radical slashing of valuations.
Despite all the headwinds in the online grocery market, one player has continued to grow on top of the first pandemic growth. In 2022 HelloFresh (Q3 LTM revenue growth) increased its revenue by 32%. Compared to pre-pandemic 2019, HelloFresh revenues have tripled.
Despite continuing to grow against the current, HelloFresh has also seen its valuation slashed by -72%.
The declining valuations have not been restricted to online groceries. Also, other parts of the online retail marketplace have seen plummeting valuations. Amazon's market capitalisation has declined by -47%, Zalando's -56%, and Asos' -80%...
All this despite the overall online channel in the US not declining. Online has continued to grow overall. In Q3/2022, online surpassed $1 trillion in sales for the last 12 months. More about that here.
In 2023 it will be interesting to see whether the valuations of online retailers normalise.