Food suffers deeper retail decline

11-Aug-2014 - Last updated on 13-Aug-2014 at 11:19 GMT

Food sales are at their lowest since records began

Pressure on food industry profits looks set to continue as cash sales keep dropping, according to experts.

Food sales experienced their deepest three-month average decline since British Retail Consortium (BRC) and accountants KMPG records began in 2008, the firms revealed.

Shore Capital analysts Clive Black and Darren Shirley warned that margins could move lower when the market learns of the steps that Tesco’s incoming ceo Dave Lewis will introduce to improve the retailer’s fortunes.

‘Moving lower’

“Quite what the shock waves from any pending Tesco strategy will be remains to be seen but UK margins are likely to be moving lower rather than higher, leading to the probability of competitor response,” the analysts added.

The market is therefore contemplating “trough margins and earnings” and what that might mean for Tesco’s dividend stream – which costs over £1bn per year and is currently projected on an unchanged basis to yield 6.0%, Shore Capital said.

With the consumer economy more broadly sound it remained a question of when, not if, the rates would rise, the analysts added.

Helen Dickinson, director general of the BRC, said there were a number of reasons for the weak trading.

“July last year was a tough month to beat because consumers had really responded well to high profile exciting sporting events and of course, the birth of the royal baby,” she said.

“Food experienced its deepest three-month average decline since at least December 2008, explained partly by the continuing keen price competition between supermarkets, which consumers are taking full advantage of, and record low food inflation.”

Over the three months to July 2014, food sales declined by 1.4%, in contrast with the growth of 0.4% experienced over the last 12 months. Non-food reported growth of 3.4%, in line with its 12-month average of 3.8%.

Positive economic news

Joanne Denney-Finch, chief executive of grocery think-tank IGD, said a stream of positive economic news was having some effect on shopper sentiment.

“A fifth (20%) of them are planning to prioritise quality over saving money in their grocery shopping compared with 16% who said this a year ago, according to our latest ShopperVista research,” she claimed.

“With low inflation and a gradual return to wage growth, people are slowly becoming better placed to act on this rising focus on quality.”

Neil Saunders, md of retail analyst Conlumino, said there was a certain irony that the economic recovery should bring worse fortunes for retailers than they suffered during the depths of the recession.

“However, the results are not driven by economic forces, rather they are created by structural conditions where, relative to a very flat demand environment, there is a high and increasing amount of capacity,” he added.

It is unlikely that demand will pick up or that capacity will moderate or decline, Saunders claimed.

BRC & KMPG Retail sales monitor in numbers