Operating profit margins of the big four UK grocery retailers 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 new report.
The Big four companies include Tesco plc (Baa2 on review for downgrade), J Sainsbury plc (unrated), Asda (part of Wal-Mart Stores, Inc. (Aa2 stable)) and Wm Morrison Supermarkets plc (Baa2 negative).
“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.
We believe operating margins will fall to an average of 2.5% over the next 12-18 months for the Big Four from around 3% now, which will be roughly half their historical average.
We believe the Big Four will have to cut prices further to stem their sales declines and slow market share losses.
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 the discounter’s UK market share could be similar to that of discounters in other European countries at around 12%-15%.
Discounters’ sales growth may slow, but footprint will increase
Adapting sales channels is key element for turnaround of traditional grocers. We believe that Morrison is better positioned than Tesco and Sainsbury because its store network comprises smaller supermarkets and it has very few of the larger stores which are facing the highest decline in footfall.
Please see the full report attached and the accompanying press release pasted below.
If you would like to speak to Sven, please do not hesitate to contact me via phone or email to arrange an interview. Alternatively, feel free to extract other quotes, attributable to Sven Reinke, Vice President – Senior Analyst at Moody’s.