Britain’s supermarket price war is likely to continue for up to 18 months, according to a report, with the big four grocers expected to suffer depressed profits until 2017.
Moody’s believes profit margins at market leaders Tesco, Morrisons, Asda and Sainsbury’s are unlikely to recover until 2016-17 due to further rounds of price cuts and sales declines. But the credit rating agency predicts sales should then turn positive as the price gap with the discounters, led by Aldi and Lidl, narrows.
It expects the big four’s share of the UK grocery market to fall by 4% by 2020, with Aldi and Lidl taking a larger slice as they continue to open new stores. Aldi, which owns 560 stores in the UK, is aiming to have 1,000 sites by 2022, while Lidl, which has more than 600 stores, is opening 20-40 new stores each year. Though their sales growth has slowed, Aldi and Lidl’s combined share of the UK market is expected to reach 12-15% by 2020.
According to Kantar, the market research firm, Lidl and Aldi’s sales growth has slowed to 10% and 15% respectively – less than half the rate of 2013 and the first half of 2014. Moody’s predicts this will slow further, to high single-digit figures by the end of this year.
Sven Reinke, senior analyst and vice president at Moody’s, said: “Although the discounters’ sales densities have caught up with the big four retailers, Aldi and Lidl could continue to gain around 1% market share every year supported by their store expansion plans at a time where the big four selectively close unprofitable stores in order to save costs.”
However, Moody’s believes the UK’s economic recovery, rising wages, improving consumer confidence and strategies adopted by the big grocers could lead to better margins from the 2016-17 financial year onwards.
There remained a risk of an escalating price war if the big four struggle to adapt to lower market shares, Moody’s said, but it played down the prospect. It said Asda aside, none of the other three players were able to engage in many more rounds of price cuts as they had limited financial capacity to absorb further margin declines. However, takeovers among the big four were also unlikely because of competition concerns.
Moody’s said the big four needed to figure out how to make large stores more profitable, and begin to generate sustainable returns from their online businesses.
