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Supermarkets making error in scrapping delis despite squeezed profits – analyst

Supermarkets are making a “mistake” by scrapping services like fresh food counters and underestimating discounters like Aldi, analysts have warned as Tesco becomes the latest chain to announce a shake-up of its stores.

The UK’s largest supermarket revealed that about 2,100 jobs are at risk amid plans to shut its remaining counters and hot delis, and a number of in-store pharmacies.

The move follows rival chain Asda announcing earlier this month it is reducing pay for more than 4,000 night workers and cutting down staff hours across its in-store Post Office shops.

However, major supermarkets could be pushing away loyal customers by removing in-store services that shoppers enjoy, Richard Hyman, a retail analyst and partner at Thought Provoking Consultancy (TPC) suggested.

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He told the PA news agency: “I think it is a strategic mistake to diminish and reduce service levels in major supermarkets because it is the key thing that differentiates them from the discounted supermarkets.

“The majority of households still prefer to shop at the major supermarkets because of reasons to do with greater choice and greater service.

“So, if you are going to play around with those service levels, then you need to be really careful that you’re getting the balance right, and I’m not 100% certain that they are.”

Mr Hyman said the value supermarkets, like Aldi and Lidl, have rapidly increased their share of the market and have already taken billions of pounds worth of sales from the “major players” like Tesco and Sainsbury’s.

“Major players and the City have consistently undervalued the value players, who are extraordinarily good at what they do,” he told PA.

“They really thought that their customers would never be caught dead in one of those shops.

“But making that wrong judgment has cost them billions and billions of pounds, and I think they still underestimate them.”

However, Tesco said on Tuesday it had seen a significant decrease in demand for its counters over the last few years and its customers “no longer say they are a significant reason for them to come in store and shop with us”.

Sainsbury’s made the decision to close all its meat, fish and deli counters in 2020 and last year shut down its 200 in-store cafes.

Earlier this month, LloydsPharmacy said it will pull out of its 237 pharmacy sites within Sainsbury’s supermarkets.

Richard Lim, chief executive of consultancy Retail Economics, said supermarkets have become “laser-focused” on profitability in the face of inflation and squeezed consumer budgets.

“Over the last decade, the squeeze on profitability has been immense and grocery retailers have to deal with so many headwinds – more recently, the cost-of-living impact on consumers and rising operating costs.

“At the same time, they are having to pay more on energy bills, logistic, transport and warehouse costs are going up, and they are dealing with the rise of the discounters, who are aggressively increasing their market share.

“They are, therefore, really focusing on the core business being food and having this real, laser-like focus on profitability and trying to strip out the inefficient and unprofitable parts of the business, like the hot delis.”

Furthermore, Mr Lim suggested higher-end retailers like Waitrose and Marks & Spencer will be able to fall back on their quality offering to a degree, something which makes them stand out from competitors.

Middle-class consumers making cutbacks by ditching meals out and enjoying dining in instead could be beneficial for such retailers, he said.

However, Mr Hyman warned it will continue to be a tough environment for supermarkets and the wider retail sector as consumers grapple with squeezed budgets and rising costs.

It comes as grocery price inflation hit a record 16.7% in the four weeks to January 22, according to figures from analysts Kantar.