The food retailers will be trying hard to tempt you over the coming festive season with their irresistible products, as UK food remains highly competitive. However the British Retail Consortium (BRC) has warned that Christmas dinner could be an expensive affair this year.

Data from the ONS shows food prices last month were up by 4.2% on 12 months earlier. Rising food prices can be negative for volumes and typically results in down-trading. Brexit may result in further food price hikes, labour shortages in the food industry and the loss of farmer subsidies.

Comparing the Consumer Price Index (CPI) to the Producer Price Index (PPI) shows that food CPI has increased less than food PPI – suggesting that supermarkets have not passed all the inflation on to customers and have absorbed part of it. Indeed Tesco and Waitrose have noted this, which is positive for volumes but hurts profitability.

The discounters are not immune to this either. Aldi has felt the margin squeeze as a result of its efforts to keep its prices lower than the Big Four and improve product quality, as the larger grocers have tried to become more price competitive.

We have seen many proactive strategies to improve brand, price position and customer in-store experience from the Big Four. Sainsbury’s acquired Home Retail Group while Morrisons has created alliances with both Amazon and McColl’s. The CMA (the Competition and Markets Authority, the UK’s competition watchdog) has perhaps given Tesco some seasonal cheer unveiling its provisional findings on the potential merger between Tesco and Booker, stating that it does not see any significant obstacles to competition. The merger of Tesco and Booker would create a group with a market share of close to 30% in the UK convenience segment (Booker runs more than 5,000 stores) – a segment that is likely to gain importance in the next few years as changes in consumer habits indicate huge potential in this area.

Tesco remains the leader in the UK, with a market share of 28%, but has faced fierce competition from discounters as well as the other major players. There will be no relief over the important festive period. The discounters continue to grow, Asda is recovering from its underperformance, and Amazon is increasing competition online. Increased competition means that it is unlikely that UK grocery retailers’ margins will return to the levels of 2013 and earlier.

In early January we will find out just how much goodwill has been shown to the sector.

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