Fri. Jan 21st, 2022

Like the porridge on shelves, inflation should not be too hot or too cold to be palatable to food retailers. The two largest supermarkets, Tesco and Sainsbury’s, generally benefited during periods of price inflation.

Most recently, Sainsbury’s benefited from talks about rising prices, its Christmas update revealed on Wednesday. Tesco’s should report similar happy news on Thursday. But even in such a concentrated grocery market – where four brands own two-thirds of the market – enough discounts are taking place to hide the inflationary effect. Sainsbury’s has decided to reduce price increases to keep pace with market share.

Food price inflation most recently measured 3 percent annually, but well below the high levels following the 2008 financial crisis. Rising price reports provide an opportunity to pass on costs to customers, and more. Indeed, leader Tesco’s gross margins over the past 25 years correlate strongly with higher food prices. A weak correlation for Sainsbury’s tips indicates more concern about market share.

More in the broad, earning momentum (year on year) for Tesco and Sainsbury’s has improved during periods of both UK consumer and wholesale price inflation since 2002. But the fistfights to hold on to customers again make the relationship volatile. Previous lessons from bruises with the two German discount sellers Aldi and Lidl have shown that the sacrifice of market share to them to strengthen margins has caused lasting damage to locals.

The subtle forces at play include not only price power over buyers, but also suppliers. Momentum is perhaps the biggest ally of supermarkets during higher inflation periods, thinks Andrew Porteous at HSBC. Faster sales growth helps when negotiating with suppliers. That momentum can come through discounts to improve footfall.

But what can help the two listed supermarkets the most is the fact that their smaller rivals Asda and Morrison’s have both become private. Additional leverage after these transactions could potentially limit their desire for any price fights. The latter is expected to hold rough twice the blame held it as a public company.

Expect current inflation trends to provide a soft floor for groceries in the coming year.

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