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Dean Best | 11 January 2010

While the UK's food retailers have spent the last three weeks battling the coldest weather seen in the country for 30 years, the outlook for the sector in 2010 seems just as bleak.

Behind some of the misleadingly upbeat headlines - "Marks & Spencer rides storm with sales boost" was used by one major outlet on the day that the UK retailer's shares tumbled by almost 7% - were plenty of signs that the year ahead will be just as challenging as 2009 - even for the relatively resilient food sector.

There may have been some robust numbers from the likes of Waitrose, Sainsbury's and The Co-op but the outlook for the economy remains dismal.

The bill for the banking crisis in the UK has moved from the private sector to the public sector and the mounting public debt is certain to lead to tax hikes - no matter which party takes office in the upcoming General Election. Combine the prospect of higher taxes with the removal of around GBP30bn (US$48.5bn) of short-term fiscal stimulus, a likely freeze on public sector pay and a continued tight credit market and you end up with an environment where consumers will hardly be awash with cash. The jury is also out on whether UK unemployment - which fell in November - will continue to tick downwards. That uncertainty is not specific to this side of the pond; last week, the US reported a surprise in job losses.

With consumers uncertain about their job prospects, value will remain key for consumers and the value-oriented retailer - even smaller chains like Poundland in the UK and discounters like Family Dollar Stores in the US - will continue to offer stiff competition to the established retailers.

Promotional activity is likely to remain high across the industry and, amid signs that commodity prices may again be on the rise, 2010 could be a tough year for suppliers. M&S's suppliers, including the likes of Northern Foods, Premier Foods and Uniq, for instance, will face a customer needing to invest in price to compete.

Tomorrow, Tesco will issue its latest sales numbers, which will include the festive period. The retailer, which over the weekend was revealed to have slid down the global retail rankings, accounts for roughly GBP1 for every GBP7 spent in the UK. Its financial health and its outlook for the UK food retail sector will be closely watched by those looking for signs for how the year ahead will pan out.

In recent weeks, these missives have not gone by without some mention on the Cadbury takeover saga. Last week, Kraft tweaked its offer for Cadbury and said it would up the cash portion of its offer to the Dairy Milk maker's investors. The move prompted a predictable withering response from the Cadbury board - but also caused a less predictable rebuttal from an ever-cautious Warren Buffett, the US food giant's largest shareholder.

Tomorrow, Cadbury will issue another defence document for its shareholders to digest, as well as reporting unaudited 2009 numbers and an indication of current trading. How will the UK confectioner's shareholders react?


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