January is the month where the crucial Christmas trading period is assessed, and a weather eye is cast towards the coming year. This year, both represent something of a painful process.
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Inevitably, however, the gruelling 12 months that look to be ahead of us will produce some winners as well as losers. Some retailers appear better equipped to withstand the rigours of recession, while the sector’s fortunes remain dependent on many factors beyond individual companies’ control.
just-food asked four prominent analysts for their views on the year ahead.
Nick Bubb, Pali International
The big winner of 2008 was Morrisons, but the law of averages will gradually catch up with them in 2009 and sales performance will be pulled back into the pack, with not much difference between the sales growth rates of the “Big 4” this year. The big losers in 2008 were the premium operators, M&S and Waitrose, but they will continue to underperform and struggle to retain pricing credibility.
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By GlobalData |
Those consumers with tracker mortgages who haven’t lost their jobs will feel a bit better off this year, but the fear of unemployment will mean that everybody will seek value for money. The “Big 4” are very skilful at appearing to deliver that, in terms of promotional hype, but the much feared “price war” will continue to be a phoney affair, financed by suppliers.
The hard discounters can continue to pick up the market share held by Kwiksave, but their PR will again outweigh their actual impact on the overall market and the mainstream supermarkets should focus more on each other, rather than look at what Aldi and Lidl are doing. Tesco‘s rather heavy-handed “Discounter” strategy may need to be de-emphasised in due course. Sainsbury will keep demonstrating that its business has a broad appeal to consumers and that it can more than hold its own in these tougher times for the economy.
The big unknown for 2009 is how far the relatively helpful food price inflation of 2008 will moderate. A move to food price deflation seems unlikely, given the impact of the collapse in sterling on import prices, so this may turn out to be the dog that didn’t bark.
Keith Bowman, Hargreaves Lansdown
Tesco still remains the favoured of the food retailers, by market consensus, although their trading statement in early December did see a marked decline in growth, particularly in UK like-for-like sales. So there’s no doubt that the consumer retrenchment we have seen over the course of 2008 has even impacted on the likes of Tesco, and there is some suspicion that management may have had their attention diverted a little by their overseas expansion, and may have underestimated the difficulties as far as the UK economy is concerned.
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Morrisons have seen some very strong like-for-like growth sales data in recent months. The fact that their culture generally is cost-conscious seems to have boded well for them. Another factor that plays into Morrisons’ hands is that this recession may be more sharply focused on the south-east and London, and Morrisons has its strengths in the north of the country.
As far as Sainsbury’s is concerned, they have seen good sales growth but there has been an element of concern about the level of promotional activity and the effect on profit margins. One thing that would bode well for them is that if consumers are retrenching from big ticket items, there may be some emphasis to not completely take the joy out of life, and one of the elements they [consumers] are doing that with is food. With Sainsbury’s, the perception is that the quality of the food is good but at the same time they are engaging in price promotion, and consumers are attracted to that mix.
At the moment, the losers appear to be Marks & Spencer. It [this week’s trading statement] wasn’t an out and out disaster by any means, but they are still seeing sharp declines.
Value has been and continues to be the driving factor as far as consumers are concerned going into 2009. You’ve got to balance that up with the quality of products, so it’s not just a case that X is cheaper than Y but what do you get for that price. I think [discounters] could still take share in the new year. If we see unemployment rising those value operators I’m sure are going to continue to see a good flow of business.
I think it [2009] is going to be very tough. On a broader basis, although there doesn’t appear to be an end in sight to the current difficulties, if we are seeing capacity removed from the high street eventually that should leave the remaining players in a better position. I’m not suggesting for a moment that we’re likely to see any of the supermarkets fall over during the course of 2009 but even Woolworths provides some competition to the supermarkets, in terms of CDs, DVDs, stationery and that sort of stuff, so any removal of capacity on the high street should prove good news for the remaining players over time.
Edward Garner, TNS
The big question is where we are with the recession in 2009, but on the assumption that the recession continues pretty similarly, in many ways the pattern is already set. There is a move to value and therefore there is a natural progression in the direction of Asda, Morrisons and the discounters, and the freezer centres. So those are probably likely to continue to be the winners.
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Morrisons will still storm ahead. It isn’t just value, it’s that people are still discovering what they are about. With their store refits and advertising, increasingly people are discovering that it’s a kind of interesting mix of value but also food provenance and quality. Obviously the discounters will continue to move ahead.
Surprisingly I think there is going to be some loss at Tesco, not because it is doing anything desperately wrong but simply because they are the biggest thing to hit out there and holding on to the top slot with such a share puts a lot of pressure on them.
With regard to losers, it is the premium retailers that are under pressure, certainly Marks & Spencer. Waitrose are coming under pressure; I think it’s inevitable there will be pressure on their share, but if you go into a Waitrose they are upping their strike rate on offers quite considerably. Waitrose has a higher proportion of loyal main shoppers than M&S. M&S is a shop that appears in lots of people’s repertoires but it is an additional shop rather than a main shop. In mathematical terms [Waitrose] has a higher loyalty.
The one that is doing surprisingly well is Sainsbury’s. And the situation there is that they are upmarket and mass market, but with a proposition that says ‘yes times are hard but you don’t have to throw everything out of the window’. They will at least hold their own; if there’s pressure on them it’s less than you might expect.
I think value will remain the key driver. I think there will be a role for the premium sector but the premium has to be justified. It has to have a reason; a snob premium won’t work. Discounters are still storming ahead. It [the discount sector] is around 6% of the market, with Aldi, Lidl and Netto, and that is bound to keep growing.
Overall, I don’t see any dramatic quantum shift to blow us off the trends we’re already seeing. Food is a hugely defensive sector. When you consider it with the wreckage of the rest of the high street we’ve still got to eat. With people trading down, we’re going to get pressure on margins but the volumes are there because we still have the same number of mouths to feed. It could get worse if we get really large-scale unemployment and you get distress shopping rather than discretionary shopping. That could accentuate the existing trends we’re seeing.
On the other side of the coin, it’s worth remembering that in a recession you do have winners as well as losers. There will be a significant number of people who perhaps have got more discretionary income. They may well have cut back on eating out, they may have postponed buying the new car, moving house, and they may suddenly be sitting on a bit of a windfall because of the interest rate reductions. And partly because of that, and partly because they want to get away from total doom and gloom, they will be quite happy to trade in the premium market.
Clive Black, Shore Capital
All of the major players are strong in an operational sense at the start of 2009 bar Marks and Spencer. Discounters are expected to continue to perform robustly as the economy turns down and unemployment grows. So, another good year for Aldi, Asda, Lidl and Morrisons.
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From its high-base sales densities, Tesco is expected to be solid; its introduction of discount brands is interesting, and price versus promotion may be a characterising feature of the year, as may coping with deflation. Deflation may pose particular financial pressures for Sainsbury’s, which has a relatively low margin compared to its peers. We would expect Waitrose to have a more stable year against weak comparisons.
Value will be to the fore for much if not all of 2009. If the economy tail spins, which is not fanciful, there could be deflation and margin pressure. As before, the discounters are expected to outperform the mainstream and premium-end players in terms of sales growth rate and market share gains. The performance of Tesco will be one of, if not the key, features of the industry. We expect it to be more robust in 2009, perhaps making the gains enjoyed by Aldi, Asda and Morrisons more difficult to sustain and hold on to. Correspondingly, non-price factors, such as nutrition, animal welfare and the environment, may be diluted as commercial issues, although by no means going away.
The main trends will be coping with falling food inflation and the possibility of deflation in the second half of the year. We expect this to particularly challenge Sainsbury’s profitability. We also anticipate a continued emphasis and focus on value, although we do not currently predict a full blown price war. The battle between lower base pricing and promotions will be a key feature; Asda and Tesco vs. Morrisons and Sainsbury’s. Limited range deep-discounters are expected to maintain share gains but we must remember from a low base. Premium retailers are expected to find commercial life difficult, albeit M&S may commence much needed recovery in its food operations. It will be a very competitive year.
