Even David Potts was bemused by the Santa-shaped knobs of butter that appeared on Morrisons’ shelves in the run-up to Christmas.
“At first I thought it was a little bit random,” said the plain-spoken boss of the Bradford-based grocery chain. “But we sold 37,000 units at £1 each. It caught people’s imagination.”
The festive gimmick, together with a three-for-£1 deal on bags of seasonal vegetables and wrapping paper that looked as if it had been designed “this century and not the last”, helped the supermarket to its best Christmas performance in seven years. After three years of pain, and a stabilisation last year, Potts was able to announce last week a 2.9% surge in like-for-like sales — ahead of the most bullish analysts’ forecasts. He declared Morrisons had “found our mojo”.
Once the laggard of the industry, the company led a round of surprisingly strong trading updates from the food retailers. Sainsbury’s also beat City expectations with a 1% rise in sales, boosted by its acquisition of Argos, and Tesco managed to produce a 0.7% increase over six weeks, which would have been higher had it not scrapped a Clubcard promotion.
The nascent fightback from three of the “big four” — Asda, the fourth, is owned by the US giant Wal-Mart and tends not to issue a statement until next month — comes amid signs of slower trading at Aldi and Lidl, the German discounters that have terrorised them since the 2008 crisis. Despite claiming record festive sales, the no-frills grocers may have lost marginal customers because of overcrowding in their car parks and queues at their established stores, according to some analysts.
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After Clive Black, head of research at the stockbroker Shore Capital, predicted a poor Christmas showing from the discounters in last weekend’s Sunday Times, Aldi issued a furious rebuttal accusing him of bias due to Shore Capital’s role as Morrisons’ house broker. Black fired another salvo this weekend, saying Aldi was “struggling with the reality of the narrative that they have been through their peak period of potency”.
The grocery industry was buoyed by enthusiastic consumers, who spent an estimated £480m more than last year as they splashed out on prosecco and spring rolls. The splurge lifted sales by 1.8%, according to the research firm Kantar Worldpanel, which also said that more than two years of falling shelf prices had come to an end.
Families have seen their disposable income recover steadily from a nadir in late 2011; they had £200 a week to spend in December, the Asda Income Tracker found, a £7 rise on December 2015. However, the investment bank Jefferies said this Christmas could turn out to have been a “last hurrah” ahead of a tough year. Consumers are set to be squeezed by lower wage growth brought on by economic uncertainty over Brexit and inflation of 3% due to the pound’s collapse against the dollar and euro.
Bruno Monteyne, an analyst at Bernstein Research, said it would take three years of such conditions to prompt a noticeable change in shoppers’ behaviour. He argued that switching from Kellogg’s corn flakes or Pampers nappies to a supermarket house brand would be enough to offset 3% inflation on a basket of 50 items.
Nevertheless, he described the sales recoveries from Morrisons, Sainsbury’s and Tesco in cautious language. “I wouldn’t overstate the significance,” he said. “It’s an important step forward in an ongoing process of improvement.”
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A former supermarket executive put it in blunter terms. “The danger for both [Tesco and Morrisons] is that people declare victory when their chief executives are making far lower profits than the two guys who just got fired,” he said, referring to the ousting of Tesco’s Philip Clarke and Morrisons’ Dalton Philips in 2015.
The big question is whether Aldi and Lidl have the firepower to maintain the price war if the big four start to pass on inflation to customers. On a recent trip to an Aldi store in West Yorkshire, Steve Dresser, an independent retail consultant, tweeted a picture of four different kinds of rice on the shelf and asked: “Why?”
His point was that Aldi seemed to be diluting its model of stocking a limited range of products by offering unnecessary choice. Aldi, owned by Aldi Süd, and Lidl, part of Schwarz Group, try to keep prices low by buying a small selection in huge volumes. A few years ago the average discount store stocked about 1,200 products; a big Tesco would stock as many as 30,000.
Bulk buying and ruthless cost management is the apparent alchemy that allows them to sell bottles of champagne for £9.99 and whole lobsters for £2.99. Aldi and Lidl have grown like weeds since the financial crash as a result, almost doubling their combined store numbers to 1,342 and amassing market share of 10.4%.
In the past two years they have tried to present themselves as mainstream grocers, stocking a wider range of “premium” items such as truffles and vintage port and refurbishing stores with wooden floors. The number of products in some stores is estimated to have swollen to 2,000.
“The danger is Tesco and Morrisons declare victory when they are making lower profits than before
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Over the same period, the big four have narrowed the price gap with the discounters in varying degrees. An industry insider estimated it had come down from about 18% to 8%, although he said it was difficult to be precise.
The combination of a more competitive environment and their push upmarket has tested Aldi and Lidl’s profit margins. They showed signs of stress in November, when they raised the price of four pints of milk from 95p to 99p and the price of a 1kg bag of bananas from 68p to 72p. Such moves might seem minuscule, but both products are fiercely contested as they can lure in shoppers, and an insider said Aldi and Lidl would not have acted unless they were under pressure.
Given their exposure to the euro because of their sourcing network, the implication is that the discounters may be forced to raise prices in tandem with their mainstream rivals because of the weak pound.
Last weekend, Black predicted flat Christmas sales at Aldi’s existing shops and a drop of up to 4% at Lidl. On Monday, Aldi announced a 15% upswing in total sales, saying shoppers had flocked to “Specially Selected” products such as Argentine Malbec and mince pies. Lidl said its total sales had risen by 10%.
The claims prompted more questions than answers. Both initially refused to disclose like-for-like sales, meaning the numbers were distorted by new store openings. Aldi has 692 shops, 70 of which opened last year, implying at least 10% of its sales growth came from expansion. Lidl has 650 sites and opened 35 last year, giving a boost of about 5%. Aldi later said its like-for-like sales were up by 5%
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The discounters also disclosed sales only for the calendar month of December, when trading reaches a peak, as opposed to much longer periods for the three listed grocers. Mike Coupe of Sainsbury’s, which reported over 15 weeks, said: “If you’re a private business and you don’t even say what days you’re reporting for, then clearly you can choose the story you may or may not wish to tell.”
As founder of the One Stop convenience chain, Kevin Threlfall knows a thing or two about the grocery industry. He isn’t feeling confident for the year ahead.
“I don’t own a single retail share now,” said Threlfall, who is semi-retired. “I can’t see why anybody would want shares in a company with retail space they’re paying rent and rates on.”
Threlfall’s bearishness reflects the immense cost headwinds retailers face this year in the form of the apprenticeship levy, the national living wage, a revaluation of business rates and sterling’s drop.
Profits are already billions of pounds lower than three years ago. Having dug deep to make prices more competitive, Tesco is on course to make an operating profit of at least £1.2bn this year — little more than a third of the £3.3bn it made in 2014, before Dave Lewis took charge. Morrisons is expected to report underlying pre-tax profits of £330m-£340m, less than half the £719m made by Philips in his last full year in charge.
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That would be fine in a world where investors were happy to accept lower returns from supermarkets. But the stock market has placed punchy ratings on Tesco and Morrisons. Both are valued at about 20 times their projected 2018 earnings, indicating the City expects them to grow their profits in the next few years. Given the huge cost pressures about to hit retailers, that is difficult to imagine.
An industry source said they would be forced to push prices back up to reach that level of profitability, which would give renewed oxygen to the discounters. He predicted Aldi and Lidl would do whatever it took to regain their pricing advantage.
“If I’m sitting in Germany and I’m a private business that has done very well from 2010 to 2014 by having an 18% price gap to the big four, I don’t understand why I wouldn’t say, ‘Let’s put our foot to their throats’,” he said.
M&S warmed by cashmere
Marks & Spencer’s boss made a donation to the homelessness charity Shelter this Christmas rather than send out gift hampers to contacts.
Steve Rowe, a Millwall season ticket holder nicknamed Nails, broke with another tradition by increasing like-for-like sales at M&S’s troubled clothing division. The 0.8% increase over the festive period was its first in six years.
Helped by demand for Per Una cashmere jumpers, M&S provided the highlight of a strange fortnight when the weakest fashion players produced better-looking results than the strong.
Debenhams, another perennial flop, saw its British sales rise by 1%.
In contrast, high street stalwart Next shocked the market by missing analysts’ forecasts, and John Lewis warned of a “significant” cut to its famous partnership bonus.