Grocery market sees first decline since January

The grocery market slipped into decline for the first time this year as a result of the ongoing price war between the retailers – but the greater competitiveness of the sector was likely to stand it in good stead in the fall-out from Brexit, analysts argued.

Grocery-ShoppingSales were down 0.2% as like-for-like grocery prices fell by 1.4% on last year, according to the latest KantarWorldpanel figures, which covered the 12-week period to 19 June 2016.

Fraser McKevitt, head of retail and consumer insight at Kantar said although the sales covered the period before the Brexit result, it was unlikely that the immediate economic uncertainty was likely to cause a substantial fall in grocery volumes, even though a longer term change in exchange rates could threaten the current period of cheaper groceries.

“The immediate economic uncertainty is unlikely to cause a substantial fall in grocery volumes, as demonstrated by the 2008 financial crisis when basic food, drinks and household sales proved resilient,” he said. “Historically, higher prices have led to consumers looking for less expensive alternatives such as own-label products, seeking out brands on promotion or visiting cheaper retailers.”

It showed the discounters hitting a combined market share of 10.5%, with Lidl holding a market share of 4.4% and Aldi 6.1%, with sales up 13.38% and 11.5% respectively year-on-year. Around 58% of Britons had visited one of the discounters in the period, KantarWorldpanel noted.

All of the big four continued to see a dip in overall sales, with Tesco dropping -1.3%, Sainsbury’s -1.4%, Morrison, -2.4% and Asda by -5.9%, but The Co-op saw good growth of 2%, while Waitrose, which has been in continuous growth since 2009, was boosted by its premium offer, growing 1.3%.

Overall the sector was more resilient now than it had been for “some time” due to the “fundamental” change in the retail market over the few years and the “intelligent reappraisal and implementation of strategic moves to structurally narrow price differentials with the discounters”, according to analyst Darren Shirley of Shore Capital.

“The prospect of food inflation rising has grown but it will be tempered by the new competitive dynamics,” he said. “If imported prices rise then the UK can expect to face some inflation and perhaps some gross margin compression for retailers.”

“Even if sterling remains weak, a return to cost of goods inflation is not necessarily going to be fully and immediately reflected in higher shelf edge prices due to the new competitive dynamics,“ he said.

However, he cautioned that it was hard to see how confidence and expenditure was likely to be boosted by the EU referendum and although food was likely to be more resilient, it could affect  “discretionary” segments (which is likely to include beer, wine and spirits) that were less resilient.

He also noted that German discounters Aldi & Lidl were exposed to greater currency challenges due to the level of imported goods from Europe. “Here the sterling/euro relationship is important, he noted. “The limited assortment discounters’ margins could be in for some pain although not enough to our minds to curtail present opening plans.”

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