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    ‘Margin pressure could extend into 2024’

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    Slowing inflation is rendering European food retailers’ key sales-growth metric more challenging and margin pressure could extend into 2024, reveals Bloomberg Intelligence’s (BI) Europe Retail Staples & Wholesale 2024 Outlook.

    According to BI, more-indebted retailers like Asda and Wm Morrison have been losing share for at least a year, which needs work to reverse. Carrefour, Tesco and other supermarket incumbents need to consolidate share and, where possible, stop customers switching to discount rivals with lower cost structures (Dino Polska, Jeronimo Martin), as well as Aldi and Lidl.

    BI found that online grocery remains below pandemic highs, with Ocado paring capacity. Food-delivery peers (Just Eat Takeaway, Delivery Hero, Deliveroo) are focusing on profit, as customer loyalty faces the test of rising delivery costs and fewer subsidies.

    Charles Allen, retail analyst at Bloomberg Intelligence, commented, “Operating cost increases, especially wages, may not slow as rapidly as the cost of goods, suggesting margin pressure could extend into 2024. This prolongs the challenge to find further efficiency savings to match the lower cost structure of limited assortment discounters such as Aldi and Lidl.

    “UK retailers B&M, Sainsbury and Tesco have been among the best-performing food retail stocks in 2023 as the feared margin squeeze proved to be mild. Greater price competitiveness by supermarkets narrowed the sales-growth gap with discount grocers. Margin erosion after heavy capital investment has hurt Axfood and, to a degree, Hello Fresh.”

    European food inflation is slowing rapidly and, in some categories, could tip into deflation as many commodity prices have dropped. As list prices tend to remain sticky, the most likely way to lower prices is through promotions, a practice that probably favours larger supermarkets such as Tesco, Carrefour and Ahold Delhaize in mature markets, over discounters who prefer everyday low prices.

    Heightened promotional activity is a consequence of the slowdown in inflation, as branded suppliers seek to regain volume that was lost in reduced consumer spending and switching to private label. Tesco and Sainsbury are taking advantage of the additional funding to offer discounts to members of their loyalty programs, from which performance data can be extracted and sold back to suppliers.

    Charles Allen, added: “A heavier branded promotional stance emphasises large supermarkets’ differentiation from discounters, which historically carried fewer brands. Discounters and some supermarkets pursue an EDLP (everyday low price) to try to collapse promotional funds into a lower list price. If suppliers push back, as is likely given a desire to retain higher list prices, then, even within EDLP, limited-time promotions or offer rewards are possible.”

    The 10 per cent increase in the 2024 UK minimum wage to £11.44 an hour suggests employee pay could continue to rise even as price inflation slows. For supermarkets, more rapid European wage growth may increase squeezed household spending, yet it’s also likely to put pressure on margin as it increases expenses just as revenue loses the pricing boost. Greater spending power could also attract consumers back to supermarkets, which typically stock a wider assortment, from compared to more narrowly-ranged discounters like Aldi and Lidl.

    Supermarkets are more labour intensive than discounters, even with the management streamlining and removal of, for example, service-counters at Tesco and Sainsbury. The wage increases that are likely in 2024 could arrive just as nominal sales growth slows.

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