Blog: Dean Best"Keep out" of UK grocery retail, analyst warns investors

Dean Best | 11 September 2012

Investec analyst Dave McCarthy raised eyebrows in the sector today (11 September) with a note kick-starting his coverage of the UK food retail stocks that damned the short-term prospects for the industry.

McCarthy said investors should avoid the sector, which he claimed was facing "the worst industry conditions for over 30 years" and was going through a period of "structural change".


He wrote: "Industry profits peaked in 2010 and are now in decline as consumers reduce expenditure, shop in ways that are inherently more expensive to serve and as retailers compete to protect sales. High operational gearing is translating these weak sales into significant profit impacts. High capex is also set to continue, with capacity still growing ahead of demand over the medium term. The market has not yet fully accepted that long-run returns are falling, and while recent good weather has been a boost, fundamental issues will come back to the fore in the fourth quarter."

Capacity was cited as a key problem. There have been signs in recent weeks that the sector is starting to reappraise its expansion plans, with Morrisons last week announcing plans to reduce its capex by GBP100m in the next two years. Even then, however, Morrisons was quick to emphasise the investment it was making, including plans for convenience stores in London.

McCarthy said, across the industry, the situation was being made worse by the growth of the online channel.

"The situation is exacerbated by the growing popularity of the internet, which is effectively adding significant virtual capacity. Any industry adding capacity faster than demand will see LFL sales and productivity suffer and, with high operational gearing, food retailing faces acute problems," he wrote.

There is, he added, an "intense" battle for sales, which had led to promotions and the use of vouchers at "record" levels.

The analyst's comments came on the day the latest Kantar Worldpanel sales figures were released. Kantar said the growth in sales had outstripped inflation but sales had slowed. In the 12 weeks to 2 September, Kantar said sales increased 3.3%. In its previous figures, for the 12 weeks to 5 August, sales grew 3.9%.

And although inflation was 2.9%, that implies only a 0.4% increase in volumes, which although welcome after months of falling volumes, suggests a decline in like-for-like volumes.

"Kantar market share shows an industry slowdown, with some disappointing results for the quoted retailers," McCarthy reflected. "Overall, the underlying dynamics of the sector point to an industry in trouble."



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