The threat of falling food inflation in the UK – and possible deflation later in 2009 – could hit profits at Sainsbury’s, the country’s third-largest grocer, a leading retail analyst has warned.
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Clive Black, an analyst at Shore Capital, said the “main trends” facing UK grocers this year will be coping with falling food inflation and the possibility of deflation in the second half of the year.
According to figures issued this week by researchers TNS Worldpanel, UK grocery prices rose 8.3% in the 12 weeks to 28 December. However, the result marked the third successive drop from a peak of 9.3% seen in the 12 weeks to 5 October.
In recent months, Sainsbury’s has boosted sales with a focus on promotions. Like-for-like sales excluding fuel rose 4.5% during the 13 weeks to 3 January.
However, Black warned that the prospect of falling food prices could have consequences for margins at Sainsbury’s.
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By GlobalData“Deflation may pose particular financial pressures for Sainsbury’s, which has a relatively low margin compared to its peers,” Black told just-food. “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.”
Looking at the broader UK food retail scene, Black believed value “will be to the fore for much if not all of 2009”.
“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,” Black said.
Nevertheless, Black said he expects Tesco, which this week posted a 2.5% increase in like-for-like sales for the seven weeks to 10 January, to perform more strongly in 2009.
“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,” Black said.
Sainsbury’s officials could not be reached for immediate comment.
