Talk of a consumer downturn in the UK has increased since the turn of the year after a series of downbeat updates from the country’s retail sector. Food retailing, however, is showing signs of bucking that trend. Dean Best reports.
We’ve all got to eat. That rather simplistic notion is one that should bring cheer to the hearts of those who work in food retailing in the UK.
The retail scene in the UK has had a difficult start to 2008. It seems a combination of factors, including fears over mounting debts and rising energy bills, has put the wind up UK consumers.
In the last week, clothing retailer Next has posted an underwhelming trading update, while a profit warning from electronics retailer DSG also spooked the City. And yesterday (9 January), Marks & Spencer, one of the flagships of the UK high street, reported a fall in like-for-like sales. Shares in M&S tumbled and there were fears that talk of a consumer downturn had become fact.
However, food retailers seem more robust in the face of this nervous economic climate. A report published last week by business advisory group Grant Thornton said grocers were outperforming the wider retail sector, further stating that for five successive quarters, 100% of listed food and drink retailers had seen an increase in like-for-like sales.
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By GlobalDataAnd, in the last 24 hours, two of the UK’s big four grocers have indicated a continuation of that trend. Asda, owned by US retail giant Wal-Mart, claimed it had its “best ever” Christmas, although it declined to give figures.
Meanwhile, Sainsbury’s, the UK’s third-largest grocer, saw like-for-like sales for the three months to 29 December, excluding fuel, rise by 3.7%. Sainsbury’s chief executive Justin King said: “This is a good result for the Christmas quarter, and is particularly pleasing given the level of competition during this period.”
King, like his counterpart at Asda, Andy Bond, both see consumer spending under pressure in the months ahead. However, there is a confidence that food retailers in the UK can ride out any economic turbulence on the horizon.
“While we’re spending more of our disposable income on petrol and energy, we’ve still got to eat, so that should keep the top-line ticking over,” Darren Shirley, an analyst at UK broker Shore Capital, tells just-food.
Rising commodity costs over the last 12 months have led to inflation in the food sector and Shirley believes slightly higher prices will help drive revenue growth for the UK’s big four grocers.
“There is some inflation about in food; food retailers are talking about 1-2%, which will be helpful,” Shirley says. “General retailers are talking about mid-single digit deflation, which when combined with declining volumes is a vicious circle. Food retailers won’t be issuing buoyant like-for-likes but they will keep their top-lines ticking along.”
Nevertheless, UK food retailing is set to be as competitive as ever in 2008, which could prove something of a headache for suppliers facing continuing cost pressure. Shares in Premier Foods, the UK’s largest food group, slipped today after it warned that commodity costs will continue to bite this year. Grocers, however, will be reluctant to fully pass these costs on to shoppers. “You don’t need to be a rocket scientist to see that as belts are being tightened, then value will move up the consumer agenda,” Shirley says.
Morrisons, the UK’s number four grocer, is in buoyant form, again growing its share of the grocery market in recent weeks. Morrisons’ share of the market grew to 11.4% in the 12 weeks to 30 December, up from 11% a year earlier, according to market analysts TNS.
“It is the highest growth rate of any grocery retailer for this Christmas period,” says TNS director of research Ed Garner. “The relaunch advertising and a campaign of aggressive promotions have succeeded in attracting an increased number of shoppers to the stores.”
According to TNS, Tesco, Asda saw only “marginal” share increases over the crucial Christmas period, while Sainsbury’s share remained flat. “Nevertheless, this confirms the relatively robust performance of the grocery sector in the face of the pressure on consumer spending which has produced downturns and profit warnings elsewhere on the High Street,” Garner adds.
There is pressure on consumer spending in the UK, a trend also felt in the pockets of shoppers across the Atlantic. However, at least in the UK, there is a view held by some in the industry that belt tightening might not necessarily lead to a race for value, which could provide some good news for brand-owners.
Perhaps, they argue, UK shoppers are cutting back their spending on non-food items to make sure they have the cash for quality food. It’s a point of debate but it will be something worth watching in 2008.