Bill Jamieson: Is Tesco part of squeezed middle?

Sales at Lidl are up 14 per cent on last year, as both it and Aldi expand across the country. Picture: Greg Macvean

If you’re looking for clues to describe the big macro trends in our economy – what’s growing and what’s slowing – look no further than your local supermarket. For today you will find some truly dramatic trends under way.

Tesco, the giant of food store retailing, the colossus whose growth seemed unstoppable, is suffering an abrupt reversal of fortune.

No longer is it sweeping all before it. Figures released yesterday showed it suffered a 23.5 per cent plunge in profits to £1.4 billion in the six months to 24 August. UK like-for-like sales – excluding new store openings – are down by 0.5 per cent.

The setback comes in the wake of criticism of tired-looking, down-at-heel stores which prompted the group last year to launch a £1bn UK stores upgrade. So far there seems little sign it is working.

Tesco is still a highly successful and innovative retailer, but the group which claims 18 million Clubcard holders and more than 3,000 stores UK-wide blames “a challenging retail environment”.

As if to make it all the more galling for Tesco, mid-market rival Sainsbury’s reported a 2 per cent rise in like-for-like sales during the second quarter of its financial year.

So where are Tesco’s customers going? Here we may be witnessing a deepening divide across the UK food retail market. Customers are deserting in two different directions.

Many are switching to low-cost outlets such as Aldi and Lidl. The former saw its UK pre-tax profits surge 124 per cent to £158 million last year, with the company saying it attracted a million more shoppers through its doors. Recent figures from Kantar Worldpanel show that sales at Aldi are up a massive 32.7 per cent on last year, while rival Lidl grew an impressive 14.3 per cent.

But arguably more intriguing is the growing pull of upmarket food retailer Waitrose. The group, part of the John Lewis partnership, has long been viewed as a niche retailer, confined in Scotland to the more affluent areas. Surely it could pose no real threat to the Tesco colossus?

But here too, sales are surging. The group is now undergoing the biggest expansion in its history. This year it has set its sights on opening up to ten supermarkets and ten “little Waitrose” convenience shops to add to its current total of 300.

It has seven stores in Scotland and aims to take this total to 20 by 2015. It has already opened in Stirling and Newton Mearns and has secured planning permission for a store in Milngavie, north of Glasgow. Waitrose sales overall were up by 6.5 per cent year-on-year (excluding petrol) in the week to 21 September.

Here we come to the heart of the mystery. Tesco’s chief executive, Philip Clarke, said that while Tesco was “making progress” he saw little improvement in consumers’ spending power. “There is less pessimism around, but customers are still not seeing real disposable incomes improve,” he argued.

But if that is the case, how could it be that in the era of “the squeezed middle” and “the cost of living crisis”, a group such as Waitrose should be gaining customers at all? Surely it should be Tesco that’s doing the gaining and Waitrose withering on that niche, organic, artisan vine.

One intriguing theory is that the great divide in the food retailing sector reflects a polarisation of incomes and wealth across the economy as a whole. And the engine that’s been driving this divide is the very policy deployed to help create and sustain an economic recovery – the resort to looser money or “quantitative easing”.

This has done little so far to lift average household income and wealth. But by driving up the prices of assets such as property, shares and bonds, it has been highly beneficial for the already “haves”, with the gap widening between them and those who constitute the “have nots”.

Bengt Saelensminde, commentator on The Right Side financial website, explains it thus: “Essentially, both ends of the market are flying. The budget end is driven by necessity as family budgets creak, while the luxury end benefits from the feel-good factor from rising asset prices.

“Aldi and Lidl have between them managed to grab 11.5 per cent of the grocery market. Their stripped-down shops are popping up all over the country. And the upmarket Waitrose has 10.9 per cent. As Edward Garner, director at market research outfit Kantar, says: ‘Strong performances by retailers at both ends of the market pose a significant challenge for the big four supermarkets… and is forcing the major supermarkets to compete for an ever-smaller middle ground.’

“So there you have it: QE has led to more sales of high-end balsamic vinegar at Waitrose and discount cereals at Aldi.”

It might also help to explain the continuing progress of the Waitrose parent John Lewis in the face of “the cost of living crisis” and “the squeezed middle”.

Sales at the department store group were up 8.5 per cent year-on-year in the week to 21 September. This followed a gain of 14.1 per cent the previous week and was above the overall increase of 7.6 per cent in the eight weeks trading to 21 September. Meanwhile, online sales were up almost 23 per cent year-on-year in the week to 21 September.

Some might be tempted to attribute this to the government’s Funding for Lending Scheme to encourage more borrowing and promote house purchases. This has given rise to concerns that we are heading for yet another borrowing boom and bust.

But are we really? The Bank of England reported this week that households are continuing to pay down mortgage debt. Instead of “equity withdrawal” that fuelled the spending explosion in the decade before the financial crisis, there was a record net housing equity injection of £15.4bn in the second quarter. It is the 21st successive quarter in which households have opted to pay down mortgage debt. The cumulative net injection of equity into houses since the second quarter of 2008 now tops a colossal £209bn.

We may not be saving much but many households are choosing to deleverage. And in the counter-intuitive way that economics often works, this may help to explain why consumer confidence hit a near six-year high last month.

All this, however, may be masking a bigger phenomenon: a surge at both ends against a high-street middle. The tills at Aldi and Waitrose are ringing. At squeezed and buffeted Tesco they’re squealing. The polarisation of Britain, it seems, is not confined to party conference politics.