While retailers are currently managing high food inflation levels in the UK, prolonged exposure to such market conditions could prompt consumers to trade down, a retail analyst has warned.
According to figures out today (3 May), food inflation hit 4.7% in April, up from 4% in March.
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The BRC-Nielsen Shop Price Index revealed that this increase was driven by a 6.9% jump in ambient food prices – notably cereals and bread which rose due to high grain costs. Fresh food inflation trailed at 3.3%.
“Such upward pressure is testing the consumer, the retailers and the supply chain; as we have seen in countless downgrades to our sales and margin expectations for consumer staples companies forecasts,” ShoreCap analyst Clive Black said.
Currently, the response of retailers to inflationary pressures is “limiting trade down” to shifts in product mix, Black observed. According to BRC-Nielsen data, promotional levels in the UK are at a “record high”, with around 40% of groceries purchased on promotion.
However, Black added, evidence of consumer trade down can already be noted in the spike in the market share of German discounters Aldi and Lidl. According to the latest Kantar Worldpanel supermarket share figures, in the 12 weeks to 17 April, sales growth at Aldi and Lidl surged 15% and 14.7% respectively, taking their market shares to “record highs” of 3.3% and 2.6%.
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By GlobalData“Like many in the trade, we harbour reservations that continued upward price pressure may turn inflation from a largely retail virtue of manageable inflation into a vice of something less manageable if it does spawn trading down and so margin pressure,” Black said.
ShoreCap has already downgraded its fiscal 2011/12 sales expectations for Morrison, Sainsbury and Tesco in the UK. However, Black acknowledged that Morrisons might not feel the sting of trade down as significantly as its other ‘big four’ rivals – including Wal-Mart’s Asda – as it has a smaller non-food offer.
