Supermarkets battle for customer loyalty as inflation drops
SUPERMARKETS have shown themselves to be almost impervious to the recession, growing profits while other retailers foundered.
But both Tesco and Sainsbury’s have now warned the bolstering effect of rising food inflation is coming to an end. And as the big names scrap for a larger slice of the UK pie, the battle for the nation’s wallets is fast turning from eye-catching promotions to customer loyalty.
Tesco, the UK’s largest retailer by a distance, reported half-year profits at the top end of analyst expectations this week, at £1.4 billion - a rise of 1.5%.
But while the wheels are far from coming off the supermarket giant’s trolley, the firm also said the days of big like-for-like sales increases were numbered as food inflation narrows.
Shoppers have seen the price of the food in their baskets stabilise in recent months, with the eye watering increases of last year fading into memory.
Official data for annual food price inflation show it fell to its lowest level in more than three years in August - at 1.6% - after a better than expected European harvest helped bring wheat prices down.
This compares to a 4.7% annual percentage rise last year after world agricultural prices rose 40% in 12 months.
According to Office for National Statistics figures on key grocery purchases, the price of pork sausages fell 2% in the 12 months to August, following an 18% leap the previous year. White bread prices jumped 23% between 2007 and 2008 but have since fallen back, by 3%.
The onset of recession has had a profound effect on shopping habits and consumers "trading down" to value ranges have also pulled down prices.
Analysts predict food price inflation is on its way to zero and this is already showing through in supermarket figures.
Tesco same-store sales growth, excluding VAT and fuel, has slowed from 4.3% in the first three months of its financial year, to 3.1% in the second quarter.
Results from Sainsbury’s this week told a similar story, despite the fact the retailers have different reporting periods.
The supermarket has seen its same-store sales growth slow from 7.8% in the first quarter, to 5.4%.
Morrisons also cautioned there would be slower market sales growth to come when it posted its interim numbers in September, despite its like-for-like sales growing from 7.3% in the first quarter to 7.8%.
Nick Coulter, of Numis Securities, said as consumers have helped push down inflation by buying cheaper products in the recession, there is a chance they could trade up during the recovery, sending it back on an upward path.
Despite concurring on their sales forecasts, the supermarkets are engaged in a ferocious battle for market share as Tesco’s smaller rivals take bites out of its dominant position.
According to the most recent market figures Tesco continued to lose ground to its UK rivals, with its share slipping from 31.1% to 30.9% in September.
Morrisons made the biggest inroads, increasing its share from 10.8% to 11.3%, while Asda and Sainsbury’s also rose to 17.4% and 15.8% respectively.
Tesco has recently posted smaller sales growth than its competitors, allowing them to grow their slice of the market.
But Tesco appeared to suggest a turnaround in recent trading this week, as it said the second half meant it could "confirm that our growth rate has converged with the wider industry".
The group also continues to expand and is on target to open two million square feet of space this year, helping its total revenues.
Mr Coulter said Tesco was still number one in the sector, with more space and a greater return than its rivals.
"Reports of its demise are greatly exaggerated," he said.
After the recent encroachments into Tesco’s market share, he expects the sector to go back to an attritional style.
"I guess the guns have turned slightly and moved away from out and out promotion towards loyalty," he added.
Tesco stepped up its fight for customers by doubling points in its Clubcard loyalty scheme in August. The firm said it was already seeing "encouraging results" although it expects the benefits to grow over time.
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