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October 8, 2008

Crunching the numbers: UK food retail

Despite the GBP50bn (US$88bn) bank rescue package announced this morning (8 October) by the UK government, the crisis in the financial markets is still making its presence felt on the UK high street. While food retailers are better positioned to weather the storm than most, they are still feeling the effects of ever more cautious consumer spending. Katy Humphries reports.

Despite the GBP50bn (US$88bn) bank rescue package announced this morning (8 October) by the UK government, the crisis in the financial markets is still making its presence felt on the UK high street. While food retailers are better positioned to weather the storm than most, they are still feeling the effects of ever more cautious consumer spending. Katy Humphries reports. 


UK supermarkets are witnessing a dramatic shift in people’s shopping habits. The credit crunch has meant that consumers are tightening their purse strings and increasingly turning to value ranges, products that are on special offer and retailers who are successfully communicating a strong value message. 


According to figures released by market research group Mintel, over the past 12 months 41% of shoppers have switched to cheaper goods, 34% have started buying fewer premium range products and two-thirds are now looking for promotions and deals more often than this time last year.


Indeed, a spokesperson for Tesco tells just-food, the UK’s largest retailer has witnessed approximately 20% growth in its value lines over the last 15 months. This compares to overall domestic sales growth of 9.7% booked in the first half of its fiscal year.


Meanwhile, the spokesperson admits: “Growth of our Finest and organics ranges has dropped off a little”.


The spokesperson describes Tesco’s latest set of results – released last week – as “fairly strong”.


“This is because we have responded to our customers needs,” the spokesperson says. “We have expanded our value offering and we recently introduced our Discount range. But we are also investing in higher end ranges, especially as we head into Christmas. We have introduced a lot of frozen lines for Christmas because people want to start buying well in advance.”


The trend for consumers to selectively trade down can also be noted in Sainsbury’s first-half results, released this morning.


The UK’s third-largest retailer booked a 3.9% rise in like-for-like sales for the first half of its fiscal year. However, a spokesperson for the retailer tells just-food, the company has seen its sales of its entry-level Basics range rise by 30%.


While Sainsbury’s notes that consumers are trading down, the group insists that sales of its premium Taste the Difference range have not dropped off.


“We are seeing selective trading down, but unlike some other retailers we aren’t experiencing pressure on our premium range because when people substitute a takeaway for cooking at home they buy Taste the Difference ready meals or ingredients so it still feels like a treat,” the spokesperson says.


Sainsbury’s is targeting consumers hit by the credit crunch through its ‘Switch and Save’ marketing campaign. The company is investing in communicating its value message with television commercials featuring celebrity chef Jamie Oliver and highlighting the savings that can be made by switching from branded to own label purchases.


However, Sainsbury’s message does not focus solely on price.


“For Sainsbury’s price and quality go hand-in-hand. That is why consumers are switching to Basics – because the range combines low price and high quality to create value,” Sainsbury’s says.


It is this value message that has enabled Sainsbury’s to defy the gloomy predictions that were swirling around the retailer at the beginning of the week and post sales at the top end of its forecast, Verdict Research analyst Nick Gladding tells just-food.


“Sainsbury’s has become better at serving its customers and communicating a stronger value message, meaning that it is positioned well in the market,” Gladding says.


Other retail majors, Morrisons and Asda, have also been working to communicate a strong pricing message in order to cash in on the credit crunch.


As a consequence, last month Morrisons posted first-half same-store sales growth of 7.6%, while Wal-Mart-owned Asda saw comparable sales rise 6% in the three months to 30 June.


Discount outlets, such as Aldi and Lidl, are also among the credit crunch ‘winners’.


According to the latest figures released by market analysts TNS, Aldi’s sales rose 19.8% in the 12 weeks to 10 August, while Lidl saw 12.3% growth.


But where there are winners there are losers, and the UK’s high-end retailers are clearly finding the going tough in the constricting economic environment.


“Higher-end retailers – namely Marks and Spencer and Waitrose – are struggling a little,” Gladding observes.


“M&S is facing difficult positioning in a challenging market. It needs to communicate why its offer is worth paying more for. Waitrose is doing this more successfully.”


At the beginning of this month, M&S posted a 6.1% drop in domestic like-for-like sales – with food sales down 5.9% – as consumers reined in spending on clothes and its premium food.
 
Commenting on the results, executive chairman Sir Stuart Rose warned: “Consumer confidence remains fragile and the retail environment unpredictable. Consumers are increasingly cautious about their budgets.


“We have responded by offering our customers better values and more promotions across the business, while at the same time tightly controlling our costs.”


In September, Waitrose said that comparable sales were up 2.5%. However, discounting initiatives ate into first-half profits, which were down 8.4%.


Nevertheless, overall food sales are holding up “quite well” as consumers cut their discretionary spending, the British Retail Consortium’s Richard Dodd tells just-food.


“But food retailers are not just sitting on their laurels. We are seeing a lot of price-cutting promotions to try and help hard-pressed consumers,” Dodd says. 


Eyeing a bigger share of the market, food retailers are expanding their entry-level ranges and increasing the number of price promotions they are running.  However, according to Shore Capital analyst Clive Black, increasing promotional activity is not expected to have a significant impact on profit margins at the UK’s two largest retailers, Tesco and Asda. 


“It will have a modest amount of margin impact but they are working from the basis that pricing and promotional activity is self-funding and that they will gain volumes and market share.


“What we are talking about is adjusting pricing to the climate, promotional activity and strong value messages. We don’t see a price war at the moment,” Black comments.


As economic conditions worsen and price-conscious consumers trade down, the shift in previous years towards upmarket food has begun to reverse. With no end in sight to the mounting financial gloom, retailers have already begun to shift their war to the battleground of pricing and value.

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