The rise of hard discounters such as Aldi and Lidl is credit negative for Tesco plc, Asda (part of Wal-Mart Stores Inc.), J Sainsbury plc and Wm Morrison Supermarkets plc as like-for-like sales and the market share of the “Big Four” are set to decline further, putting pressure on prices and eroding margins, according to a Sector Comment which has just been published by Moody’s.
“Combined with declining like-for-like sales at the Big Four’s supermarket and hypermarket operations and initiatives to reduce the price gap with discounters to win back customers, we expect continued pressure and possible erosion of operating profit margins which could pressure the credit quality of Tesco and Morrisons,” says Sven Reinke, Vice President – Senior Analyst at Moody’s and author of the report. “However, the Big Four still have lion’s share of the market and benefit from a very large store network, brand recognition, customer loyalty and multi-channel offering.”
- The Big Four have lost a total of 3.7% market share during the past four years despite Sainsbury’s slight increase, compared with a combined 3.9% gain for Aldi and Lidl, as well as Waitrose.
- We expect the value end of the UK grocery market to remain increasingly competitive, fuelled by years of squeezed disposable incomes and real income declines.
- We expect discounters’ market share will continue to grow even if like-for-like sales growth slows because the companies have plans to expand.
- The Big Four also face increasing pressure on profitability as a result of the consumer trend toward convenience stores and online shopping and away from large, out-of-town supermarkets and hypermarkets. We believe Tesco and Sainsbury’s are better positioned than Asda and Morrisons to weather this challenge because they have a larger network of convenience stores combined with well established online offerings which will partially offset the pressure on super- and hypermarket operations.