Food giants fight on home front as customers tighten their belts

customers from their cash in the midst of the continuing recession. With

consumers tightening their belts for monetary rather than dietary

reasons, price freezes and weekly promotions are commonplace.

These together with the decision by the major food retailers to open

their English stores on sundays in defiance of the law, all serve to

illustrate the fact that in the past year underlying food volumes have

been flat with any sales increases attributable to ongoing store opening

programmes.

However this has not prevented the supermarket chains from announcing

profit increases in the recent reporting season. For instance, Argyll

group which includes the Safeway, Presto and Lo-cost trading formats,

pleased the City with its 24% increase in interim profits to #177.8m.

Lower down the scale, Dundee-based William Low raised its annual profits

by 10.5% to #23.6m.

The improved profit performance seen by the supermarket chains has

been achieved largely as a result of better cost management and greater

use of new technology in areas such as distribution, stock control and

pricing. Investment in centralised distribution has allowed UK retailers

to gain complete control over the supply chain from manufacturer to

checkout. The UK leads the field in terms of systems investment and

automation.

The market has become increasingly competitive since the likes of

Safeway and Tesco muscled in on territory previously left to Sainburys

and Marks and Spencer, namely the value-added market of ready cooked

meals and quality wines where margins are higher.

At the other end of the market, discount chains are flourishing with

Gateway rolling out its Food Giant superstores and Kwik Save engaged in

a high profile advertising campaign comparing is prices to those of its

comeptitors. However most industry observers do not think that the

recent slowdown in like-for-like sales growth across the board

demonstrates that the UK market has reached saturation point.

Researchers at Goldman Sachs suggest the decline is due to the squeeze

on consumer spending spreading into food. Analysing other periods of

reduced High Street spending since 1963, they say that it is a normal

occurence in a consumer slowdown for food sales to be hit at the stage

we are at now in the economic cycle, when the first signs of recovery in

more cyclical areas of consumer spending such as fashion, are beginning

to appear.

Worries about price wars and collapsing profitability have led to

volatitlity in the share prices of major retailers at a time when many

investors have been relying on their defensive qualities relative to

other sectors such as construction and lesiure, which have been severely

hit by the affects of the recession.

However, fears of a price war are unfounded the main argument against

it being that it is not in the interests of any retailer. The volume

gains necessary to benefit from a genuine price war are so large -- at

least 20% -- to be unlikely and in any case a speedy response from

rivals means that any competitive advantage is likely to be shortlived.

All the leading retailers are expanding rapidly and so none would want

to jeopardise their cash flow and the weaker ones such as Asda are

already too highly geared.

Analysts at Shearson Lehman Brothers believe Argyll, Tesco and

Sainsbury will be able to maintain growth of at least 15% per annum over

the next three years. New sales will account for around 8%, 3-4% will

come from inflation and 1-2% from increased volume. Margin growth will

add about 5% more to profits growth but will be offset by rising

gearing.

Newer larger stores which are springing up around the country produce

greater returns through making available a wider range of higher margin

goods and services such as instore bakeries, delicatessens and flower

shops. The development of ''own brand'' products has been and will

continue to be a key determinant of profitability with retailers able to

respond speedily to customer needs whether it be for more exotic

ready-cooked meals or environmentally-friendly household products. This

has underlined the success of Sainsbury, Safeway and Tesco in the

1980's.

The British public by and large has become accustomed to having large,

convenient, clean stores with a wide range of high quality goods both

branded and own-label. Throughout the recession although there has been

some evidence of customers trading down in south east England, this has

tended to hit the mid-market operators such as Asda and Gateway.

Fears of an invasion by European discount chains also appear to be

exaggerated with the likes of Aldi and Netto making very little impact

in the market. There are more than 750 Kwik Save stores compared with

the 33 run by Aldi. Indeed, Kwik Save has been around for 20 years

systematically undercutting its rivals and yet all have managed to

flourish which shows that price is not everything.