Britain’s biggest supermarket group reported sales from UK stores down by 0.9%, excluding fuel and VAT, in the second quarter.
Julian Wild, food group director at analysts Rollits, told FoodManufacture.co.uk: “All major retailers are finding life incredibly tough and those with the biggest market share [Tesco] are finding it the toughest.
“It is an incredibly difficult economic climate. People are spending less and will trade down.”
Without doubt, one of the retailers’ likely responses would be to sharpen their negotiations with suppliers, he said. “They will look to fight back and it’s absolutely certain that their suppliers will be at the end of that.”
Twin pressures
Tesco’s latest results were further evidence of the twin pressures affecting food manufacturers, said Wild. “Commodity prices are ebbing and flowing, with sugar prices being particularly high at the moment, and major retailers squeezing things at the other end.”
But, food manufacturers with major retailer contracts were better placed than those without them. “If you are supplying a major retailer then you really are where the action is,” he said.
Food manufacturers' response should be to “negotiate their way around the challenge, either by changing the specification of the product or its size", he advised.
The verdict on Tesco’s results from Shore Capital analysts Clive Black and Darren Shirley, was: “Tesco has delivered an interim update with unwelcome surprises at Tesco Bank, which actually could mask what we deem to be encouraging news in the rest of the business.”
Overall, Tesco’s reported pre-tax profit rose by 12% to £1.88bn with sales up by 7.8% to £31.8bn in the six months to August 27.
Tesco’s new chief executive, Philip Clarke, who replaced Sir Terry Leahy six months ago, said in a statement: “Trading conditions in the UK were difficult throughout the first half, linked in part to the continuing adverse impact of high petrol prices on customers’ discretionary spending.”
Slower than planned
He added: “While our performance in food was substantially better [than non-food categories such as electronics] and positive in like-for- like terms, our overall like-for-like growth was slower than planned.”
Meanwhile, earlier this week, Sainsbury posted UK like-for-like sales, excluding fuel, up by 1.9% in the second quarter to October 1. Black and Shirley noted that non-food goods had outsold food goods. “We believe the drivers for sales growth remain in line with Q1 [first quarter], with non-food outperforming food growth by a ratio of about 2.5 to 1 with the group remaining on-track to deliver 7-8% space growth for the year.”
Wild described Sainsbury’s result as “more resilient than expected". He added: “The retailer expected to suffer in this economic climate is Sainsbury because of its mid-range position.”
“It is the two polar extremes of Waitrose, at the premium end, and the discounters who are making progress and picking up significant market share in these tough economic times. It remains to be seen if that’s retained after the recession – but then that’s some time off.”