With the UK Treasury set to release its planned spending cuts on 20 October, industry watchers have been focused on how the UK’s largest grocery retailers see consumer sentiment in the face of the upcoming “austerity measures”.
Alongside their trading updates this week, Tesco, Sainsbury’s and Marks and Spencer said they did not expect the Government’s spending cuts to tip the economy back into recession.
“No, we don’t expect a double dip. Yes, we expect customers to have a more difficult trading environment but we expect to be well positioned,” said Marc Bolland, M&S’s chief executive.
To differing degrees, all three retailers said consumer confidence was broadly positive. Of the three, Tesco was the most upbeat, with outgoing chief executive Sir Terry Leahy saying he expects growth to pick up during the autumn, although the retailer is seeing a “trading cap”, with consumers limiting the amount of money they spend, but, seeming to shift towards more premium products.
Meanwhile, Sainsbury’s chief executive Justin King, who, as part of the Government Council of Business Advisors, may have some insight into how drastic the cuts will be, seemed unconcerned by what lies ahead. He said shoppers had changed their buying behaviours when the banking crisis hit two years ago.
“Customers did not go on some headlong charge to save money at the expense of everything else,” he said. “There has been an expectation of bad news for the last five months. The public spending cuts will only back up what consumers have dialled into already.”
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Bolland was more circumspect, saying “we haven’t seen anything yet on cuts”. However, he did argue that M&S’s customers are “a bit older and what we see clearly from our market data is that older customers are concerned about cuts but better prepared than younger customers”.
The M&S boss added that, with the VAT increase set for January, “people are going to choose more quality that lasts, focusing on a buy-once mentality, as they don’t know what’s around the corner”.
In terms of their ranges, all three retailers said they were focusing more on their top-tier lines, a sign of heightened consumer confidence. M&S shifted its focus more to value during the downturn but Bolland said today (7 October) that the retailer is “moving to a more upmarket portfolio”. At Sainsbury’s, King said yesterday: “We are focused on our top-tier products, because that’s what our customers like”.
What did seem to concern the retailers more was the ongoing impact of higher petrol prices on families’ spending power.
According to Leahy, when petrol prices peaked in May, the increased prices were adding GBP19 per month to the average family’s costs compared to the last year.
King agreed. “Fuel price inflation has continued to act as a pressure on household budgets,” he said.
However, Leahy said petrol prices are “easing” while Tesco and Sainsbury’s played down the prospect of rampant food inflation and a return to the levels seen three years ago.
King expects food inflation to rise to 1.25% and said inflation was not going to “race away”. Tesco finance director McIlwee was equally sanguine. “We’re forecasting 2-3% food price inflation for the year. It may go up a bit but it won’t reach 2007 levels when it was 8-10%.”
Some industry watchers see increased pressure on the food retail sector with the Government’s cuts to come, while others have talked of the threat of food inflation. However, the UK’s major retailers seem to be working to the dictum: ‘people always have to eat’, and nothing about consumer behaviour seems to be telling them otherwise.
“There are some tough decisions to be made, but what is important is the government gets the economy going. The economy is strong enough, they are necessary measures and our business will grow through it,” McIlwee said.