Perhaps the most surprising feature of Xmas trading results
from the major supermarkets is that even at this traditional “throw caution to
the winds and spend” time of year, shoppers were not prepared to loosen their
purse strings when it came to food and groceries.
We do not know yet what total supermarket sales were like
over Xmas, but given Tesco’s 0.3% decline in like for like sales, Sainsbury’s
1.7% drop, a not unexpected plummet of
3.1% from Morrisons, and a disappointingly flat performance from Marks and Spencer
who are supposed to be immune from penny pinching habits, the picture is
unlikely to be rosy. Waitrose fared a little better, recording a 2.8% increase,
and discounters Aldi and Lidl are both claiming their “best ever” Xmas, but as
the combined market share of these three companies is just over 13% their
better numbers will not compensate.
Hence the racheting up of price cutting announcements from
the “Big 4”. In a time of low inflation
with shoppers just not prepared to spend on food, the only way for grocers to
grow is by stealing market share. Tesco is to drop the price of 350 core lines,
and claims that over Xmas some of its vegetables were cheaper than Aldi. Asda is to spend £300m on cutting prices in
the first three months of this year, and Sainsbury £150m.
Where will it end? Many in the industry are saying that
prices generally will need to be rebased
regardless of the impact on profit margins. Morrisons chief executive,
the second CEO, after Philip Clarke of Tesco to lose his job due to poor
performance, has declared that the only
way forward is to “neutralise on price”, and then find ways to differentiate
from the competition.
The big grocers will be able to manage their way through
price wars more or less unscathed through a combination of slashing costs and
offloading real estate. They can cherry pick which products to price reduce, and
the scale and duration of any cuts. They can, and will, raise prices on many
goods to offset reductions on others.
The unknown and little discussed issue is the knock on
effect to others in the supply chain, many of whom are small businesses,
already operating on wafer thin margins. The drop in commodity prices will help. And
there may be a boost to demand. Consumption of beef and lamb for example has dropped
due to high retail prices. If, on the other hand, goods are already being
produced at below cost, as in the case of some dairy farmers, then a boost to
consumption does not help at all.
What is clear is that a low price, low growth , low profit world
is here to stay for those connected with the grocery supply chain.
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