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Big Four UK Grocery Retailers’ Profit Margins to Shrink Further

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Big Four UK Grocery Retailers’ Profit Margins to Shrink Further

Big Four UK Grocery Retailers’ Profit Margins to Shrink Further
October 22
09:34 2014

Operating profit margins of the big four UK grocery retailers – Tesco, J Sainsbury, Asda and Wm Morrison Supermarkets – are likely to shrink further over the next 12 to 18 months, as they cut prices to reverse declining sales and curb the losing battle of market share to discounters, says Moody’s Investors Service in a Special Comment report published recently.

“Further price cuts could be particularly credit negative for Tesco and Morrison as their cost cutting and efficiency measures are unlikely to fully offset the negative impact of lower prices on their margins,” says Sven Reinke, a Moody’s Vice President, Senior Analyst and author of the report.

Moody’s notes however that Morrison is better positioned than Tesco and Sainsbury to adapt, through store portfolio and cost structure adjustments, to the changing environment in which discounters have a larger market share. Morrison’s store network comprises smaller supermarkets and only a very few are larger than 50,000 square feet and thereby most exposed to declining footfall. Morrison’s centralised online distribution network may also be more scalable if online growth continues as expected.

Moody’s notes that discounters Aldi and Lidl are now entrenched and their combined market share could reach 10% over the next couple of years from 8.3% today. Over time, their UK market share could be similar to that in other European countries at around 12%-15%. Moody’s projects that discounters’ 20%-30% annual like-for-like UK sales growth will slow, but some of the anticipated lower like-for-like growth could be offset by new store openings. This will put additional pressure on the Big Four’s large stores, where footfall continues to decline.

Moody’s report, entitled “UK Big Four to Suffer Further Margin Declines as Discounters Take Bigger Slice”, is available on www.moodys.com.

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