Newspaper article The Journal (Newcastle, England)

Food for Thought - Retail Sector Difficulties in Plain View; SHARE WATCH

Newspaper article The Journal (Newcastle, England)

Food for Thought - Retail Sector Difficulties in Plain View; SHARE WATCH

Article excerpt

Byline: Andrew Miller

THE difficulties being experienced by the listed-UK food retail sector were in plain view as Morrisons issued a huge profit warning that sent share prices in the sector tumbling.

Slowing market growth, increased competition and the shift online have helped push the sector out of favour for investors, but this could present an opportunity for more long-term positions to be established.

Industry sales growth has slowed sharply compared to a decade ago. Before the crisis, a strong economy, rising incomes, non-food expansion and a more fragmented market all helped to support growth.

Post-crisis, disposable incomes have been under pressure (reducing impulse purchases), the shift to private labels has hit top-line growth, and non-food sales are being lost online. The largest concern, however, is the growth of the discounters, namely Aldi and Lidl, which are now more than just a threat: together, their market share has gone from 4% to 6% in the past three years and both are consistently growing at a 20%+ clip.

Interestingly, they both entered the UK market in the early 1990s, but consumer suspicion and entry-level private label ranges from the incumbents helped to stifle the threat.

The financial crisis and improvements to business models have boosted their growth in recent years, leaving little left to be fought over by the larger players. With the discounters' shares of the UK market still far lower than that of many European markets, they are - with the support of their store expansion programs - likely to continue to gain share in the coming years.

On top of that, the food retailers have had to deal with the shift to online shopping, both in food and non-food.

The profitability of online groceries is uncertain at this stage, while existing players are losing a slice of the pie to new entrants such as Ocado. In non-food, previous growth areas such as consumer electronics are now proving to be a headwind due to the emergence of online competition. …

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