Market braced as supermarket giants lack sparkle

Tesco and Sainsbury's are expected to reveal lower-than-expected profts. Picture: PA
Tesco and Sainsbury's are expected to reveal lower-than-expected profts. Picture: PA
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TESCO and Sainsbury’s, the UK’s biggest and third-biggest supermarket businesses, will jolt the market this week as deep consumer caution scars their festive performance.

The City expects Sainsbury’s to reveal the end of its record under boss Justin King of 35 consecutive quarters of like-for-like sales growth as cash-strapped consumers flocked to discount rivals such as Aldi and Lidl.

Keith Bowman, an analyst with Hargreaves Lansdown, said: “Promotional activity by rivals, along with the ongoing expansion of discounters such as Aldi, may have impacted.”

Bowman forecasts a dip in Sainsbury’s same-floorspace sales of about 0.5 per cent. Some other analysts predict a smaller fall of 0.3 per cent.

Despite this, Bowman said profit expectations for Sainsbury’s for the full year were unchanged as King had avoided “aggressive” promotional discounting. He added that the group’s sales falls were still likely to be dwarfed by those at bigger rival Tesco.

Industry survey figures revealed last month that supermarket discounters will be the clear winners of the festive period for grocers.

Retail consultancy Kantar Worldpanel said one in two households shopped at Aldi or Lidl over the three months to 8 December amid squeezed consumer finances and the government’s austerity programme.

Kantar said Aldi now boasted a record 4 per cent share of the market since growing its sales by 30 per cent from a year earlier. Discounter rival Lidl’s share for the 12-week period was 3.1 per cent thanks to year-on-year growth of 15.5 per cent.

A fall in Sainsbury’s sales in the 14 weeks to 5 January would compare with a 2 per cent rise in the second trading quarter and a 0.9 per cent increase in the same period a year earlier.

Morgan Stanley analysts said the group has probably been hit by aggressive price-cutting at competitors, slowing food price inflation and a drop in consumer confidence.

They predicted that the sales dip over the quarter would overshadow a better performance in the shorter four-week run up to Christmas.

However, Morgan Stanley added: “Despite a tough quarter, we continue to believe Sainsbury will deliver on its top line and profitability guidance.”

Tesco, meanwhile, is expected to have suffered from a sizeable fall in non-food sales, where it is the largest player among the big four, alongside a slide in food sales. Tesco, which reports on the six weeks to 4 January on Thursday, is already on the back foot after recently suffering a dip in quarterly sales, down 1.5 per cent in the three months to 23 November. The group, under a £1 billion restructuring launched by chief executive Philip Clarke, has been pulling out of less-profitable lines in general merchandise.

As part of the drive, Tesco has relaunched its upmarket “finest food” range and refurbished more than 100 stores, as well as ramping up its online business.

Despite these initiatives, analysts at Barclays predict a hefty sales decline of between 2 per cent and 2.5 per cent, particularly given tough comparators. In the same period of 2012, Tesco grew its sales by 1.8 per cent.