Bill Jamieson: Food giants wobble in seismic shift

Shoppers can have their cake and eat it as supermarkets bid to outdo one another. Picture: Jeff Hopkins

FESTIVE cheer, heart-warming family scenes and candle-lit dining tables groaning under the weight of food: supermarket pre-Christmas TV ads have reached a new intensity of schmaltz this week. But don’t mistake this multimillion pound TV blitz with seasonal warmth for the food retailing giants: they’re in deep freeze.

Supermarkets across the UK have suffered their first fall in sales in at least 20 years. Customers are deserting the big out-of-town sheds. A ferocious price war is tearing into profits. Store openings are being cancelled and this week brings a prediction that the big store chains must shut 20 per cent of their outlets if they are to get back to growth.

Shares in the big three quoted companies – Morrisons, Tesco and Sainsbury’s – have halved in the past year and look set to fall further.

Christmas baubles in the aisles? It looks more like a demolition ball swinging through the food sector.

It may be tempting to view reports of falling sales as no more than a temporary blip caused by unseasonal weather. Figures out yesterday from the Scottish Retail Consortium showed total sales in October down year-on-year by 1.2 per cent, with food sales dropping by 2.7 per cent. The SRC-KPMG survey also found non-food sales were flat compared with October last year.

But this is a bigger story than poor sales of sturdy shoes and winter overcoats. A survey released this week by industry analysts Kantar Worldpanel suggested a fall in UK grocery sales for the first time in two decades.

Fraser McKevitt, head of retail and consumer insight at Kantar, says: “There are phoney price wars, and there are real price wars. This is a real price war.” He said the biggest grocers were “losing market share hand over fist”.

Last week Asda reported its biggest underlying slump in eight years, with like-for-like sales down 1.6 per cent in the three months to 30 September. Chief executive Andy Clarke blamed the intensifying price war and a blizzard of discount vouchers for the deterioration.

The group’s chief merchandising officer, Barry Williams, said he had never seen so many money-off vouchers in 25 years, likening several of Morrisons’ promotions to quantitative easing. “These are desperate measures,” he says.

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Profits at Tesco, Sainsbury’s and Morrisons have also gone into reverse as shoppers rein in their spending and competition intensifies as a result of the growth of discounters Aldi and Lidl.

Tesco has been the worst performer, with sales dropping by 3.7 per cent, but Morrisons’ performance deteriorated at the fastest rate, with the slump in sales accelerating to 3.3 per cent from 1.3 per cent a month ago. Sainsbury’s trading is down by 2.5 per cent.

Another explanation is that cash-strapped households are being forced to cut back on food spending. Certainly this helps explain the march of Aldi and Lidl – though here, too, growth has slowed.

Meanwhile, customers switching to internet shopping – and another year of double-digit percentage growth in tablet shopping here looks assured – seem price insensitive and aren’t deterred by the extra cost of delivery. The one major group that is enjoying a continuing sales surge is Waitrose, the food retailing arm of the John Lewis department store group.

The upmarket grocer’s like-for-like sales were up 1.3 per cent in the half year to end July, compared with the previous corresponding period in 2013, with overall sales up by 4.1 per cent. Waitrose now has five million cardholders and plans to open a store in Corstorphine, west Edinburgh, its third in the capital and eighth in Scotland from a standing start a few years ago: a strange phenomenon for a sector thought to be bent double under the yoke of Dickensian austerity.

As for the others, there’s never been a price war quite like it. It is set to run into billions of pounds, with Sainsbury’s, for example, offering £150m of price cuts as part of its new strategy to win shoppers.

However, there are structural problems here that can’t be cured by price wars – indeed, these may be making the underlying issues even worse. According to a report on the UK grocery industry by analysts at investment bank Goldman Sachs, the UK’s biggest supermarket groups will have to close one in five shops in order to turn around their performance.

The analysis came hard on the heels of comments by Waitrose boss Mark Price at the weekend that the “Big Four” supermarkets could be forced to start closing shops as the industry faces its biggest upheaval since the 1950s.

Investors in quoted supermarkets may have comforted themselves that after the sharp falls already suffered this year, the worst must surely be over. But, say the Goldman analysts: “We believe the major decisions that will shape the future of the UK grocery market are yet to be taken.”

Goldman said the retailers had to close stores in order to reduce their cost base. “Our analysis of the UK grocery industry suggests capacity exit is the only viable solution for a return to profitable growth,” adding that store estates needed to be reduced by around 20 per cent.

It warned that if current trends continue then sales in large out-of-town supermarkets will fall by 3 per cent every year until 2020. This would mean that sales in larger stores fall by 18 per cent over the next six years. The problems facing the major supermarkets were, it said, “simply due to the pursuit of short-term profit growth in the face of deep structural shifts”.

All doom and gloom? Certainly not for consumers. The price war means an average basket of everyday goods such as milk, bread and vegetables now costs 0.4 per cent less than it did this time last year. And this price deflation is set to continue well into next year.

And it could, in time, bring a long-needed revitalisation of our ailing high streets as today’s households – a growing number of which comprises professional singletons – feel that time pressure overrides lower prices in the multi-aisle maze of the out-of-town stores.

The switch to local convenience-store shopping looks set to intensify, with customers opting for after-work “hit-and-run” shopping from a wider choice of ethnic and speciality-store formats. “Corner shops”, supplied through wholesalers, have long offered the appeal of familiarity and great convenience – and a social encounter which many, particularly elderly customers, value.

The expansion of convenience food shopping should bring a bigger footfall to the high streets, a trend that would be helped by a greater offering of café bars, meeting places and leisure- and social-event attractions.

And don’t write off the food-store behemoths: there may be fewer edge-of-town mega-stores of the lookalike Aisle 57 variety, but expect more innovation and specialisation, with more space for general merchandise and leisure attractions.

Adversity is the spur to change. And for the food-retail sector the change under way beneath the glitter this Christmas is little short of an earthquake.

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