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  1. Analysis
January 14, 2011

Talking shop: UK retailer fortunes ruled by snow business

A clutch of the UK's largest food retailers this week revealed how they had performed over the Christmas period, when the country saw some of its worst weather for 20 years. As Richard Woodard reports, there were clear winners and losers.

A clutch of the UK’s largest food retailers this week revealed how they had performed over the Christmas period, when the country saw some of its worst weather for 20 years. As Richard Woodard reports, there were clear winners and losers.

Legend has it that we British like nothing better than to discuss the weather and, as if to prove the point, this week’s slew of trading updates from UK retailers was dominated by talk of snow and ice.

Some of the heaviest snowfalls for the past two decades in southern England are not exactly conducive to enticing customers out of their homes and into your stores – and are all the more unwelcome when they coincide with what should be the busiest few weeks of trading of the entire year.

The impact of the cold brought an added frisson to the annual battle for supremacy among the giant retailers in the UK and, for once, the winners and losers were relatively clear for all to see.

Top of the festive shop was Sainsbury’s, which had a great Christmas, overtaking Asda as the UK’s number two supermarket chain (likely to be a short-lived victory, given the Wal-Mart Stores chain’s impending takeover of Netto’s UK stores).

Sainsbury’s like-for-likes in its third quarter to 8 January increased 3.6%, while total sales rose 6% – both comfortably beating analyst expectations.

Why was Sainsbury’s so successful? Thanks in no small part to non-food sales, which grew three times as fast as food sales, and also to the success of the company’s premium own-label Taste the Difference range.

But new space played an arguably even more important role. It’s significant too that the 700,000 sq ft of new shop floor that the company had to play with was made up of only 11 new supermarkets, along with 12 new convenience stores, 14 extensions and 16 refurbishments.

Extending stores rather than building new ones can make your figures look even better than normal, because their revenues are typically factored into like-for-like sales figures, arguably giving a slightly rose-tinted image of the true picture, as one or two analysts have pointed out.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, praised Sainsbury’s “clever positioning” and tactical discounting of high-margin products, adding that the weather had encouraged shoppers to concentrate their buying into fewer trips, playing into the hands of “one-stop shops” like Sainsbury’s.

Marks and Spencer was affected by the winter weather – the company reckons it took a GBP50-55m hit on sales – but buoyant clothing sales rescued the situation, along with the company’s biggest ever day of food trading on 23 December, when its stores netted revenues of more than GBP50m.

That engineered a 2.8% increase in like-for-likes (food like-for-likes were up 1.8%) and a 4% rise in group sales, prompting chief executive Marc Bolland to leave talk of snow and ice behind, instead welcoming the return of trading up – music to the ears of rival retailers too if it continues into 2011.

Bolland also signalled that more food launches had helped to counteract the impact of rising food prices and the promotional retail environment – perhaps a hint of things to come in 2011 as increasing costs continue to pinch.

Overall, M&S’s figures were perhaps best described as solid and unremarkable – or, as Hunter put it: “Whilst the update is not stunning, it is progressive.”

“Stunning” might be a word best reserved for the update offered by the biggest of all the UK retailers, Tesco. For the first time in several years, analysts were scrabbling around to downgrade their profit forecasts for the business after a lacklustre Christmas during which UK like-for-like sales inched up only 0.6%.

The gloss to the Tesco figures – group sales were up by a healthy-looking 7.6% – was supplied by the company’s international activities, which posted a sales hike of 14.2%, and 24.2% for Asia alone.

The company was also bullish about the performance of its premium own-label Finest food ranges which, like Sainsbury’s Taste the Difference, continued to find increasing demand during the festive period.

Overall, there is still much to be positive about in the Tesco figures, especially the international performance and the growth in the online business, but the hit on the company’s share price when the results were announced suggested that investors were not listening.

Part of the reason for that, as Hunter acknowledges, is simple expectation: one financial reporter dubbed Tesco the “Manchester United” of the retail sector, always to be relied upon to provide a strong performance and to come through with the right result.

But now, as Tesco’s very own Sir Alex Ferguson, Sir Terry Leahy, prepares to quit the dugout, the company has become in some ways a victim of its own success, impacted by the high expectations its long-term performance has encouraged for years.

If the winners and losers from the Christmas retail dogfight in the UK are relatively clear this year, so too are the pressures which loom on the horizon during 2011.

The squeeze is on as input costs rise and consumer spending remains fragile at best, hit by government austerity measures, job insecurity and the rise in VAT from 17.5% to 20% from 4 January.

All of these three retailers will be affected by this, and how they react to it will be the acid test of their performance in the year to come.

However, if suppliers were hoping that the increases in the costs of commodities – across food and fashion – would make price rises inevitable, they could yet to be in for a nasty shock.

As the likes of Tesco, Sainsbury’s and M&S become ever more powerful in the UK in particular, they continue to be mindful of that power and will use it to their advantage when dealing with suppliers – a familiar enough story.

But whereas in the past these ruthless negotiations were mostly played out behind closed doors, retailers are becoming more and more open about their expectations.

Witness the words of Justin King, Sainsbury’s chief executive, when asked about the impact of increasing costs over the coming months. Suppliers, he warned grimly, would have to “work very hard” to justify price rises.

If the snow and ice dominated Christmas trading in the UK this year, there could be many more cold blasts of reality still waiting in the months to come – and especially for suppliers.

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