Supermarket sales hit by economy fears

Tesco and J Sainsbury, two of the UK’s largest supermarkets, are both likely to confirm that sales across the supermarket sector have slowed markedly when they release trading updates this week.
Tesco, which shocked the market last week with news of the surprise departure of its chief executive, Sir Terry Leahy, is expected to say on Tuesday that like-for-like sales over its first quarter rose by between zero and 1.5pc, according to analysts’ forecasts. Some analysts have speculated that the figure could even fall. Clive Black, retail analyst at Shore Capital, said that he expects sales to be “flattish”, between -0.5pc to 0.5pc.
Meanwhile, Sainsbury’s is expected to say on Wednesday that like-for-like sales, including VAT, rose by between 0.5pc and 1pc over its first quarter. Excluding VAT, like-for-like sales are expected to have fallen by between 0.3pc and 0.5pc, according to some analysts’ forecasts.
Supermarkets across the board have been hit recently by rising petrol prices and the removal of food inflation from the market.
Just a year ago Tesco was seeing like-for-like sales growth of around 4pc while Sainsbury’s was seeing like-for-like sales growth of 7.8pc.
Bank of America Merrill Lynch said in a note to clients last week that Tesco and Sainsbury’s are “living with thin UK like-for-like sales”.
It said: “After visiting stores and having assessed the UK consumer outlook we reset our forecasts assuming a 1pc like-for-like industry growth for the remainder of 2010 and sub-par growth in 2011. Critically, we believe that the market will remain tough but rational and hence continue to see value in the UK grocers.”
It added, however, that a recent dip in petrol prices and the football World Cup could provide some relief to the chains.
“Ebbing comparative figures and easing petrol prices will help like-for-like sales as, short-term, as will the World Cup. Yet with an austere Budget well-flagged and the consumer finally taking note, we believe consumption will remain weak and, some may argue, will decline even for food retail,” the bank said.
Many observers believe that the slowdown should not cause too much concern and is an inevitable consequence of inflation coming out of the market. Consumers need food, no matter what is happening with the overall economy and inflation, analysts say.
Food retailers are, therefore, very defensive stocks for investors, it is argued.
In a note to clients last week, Deutsche Bank said: “We expect Sainsbury’s management will reassure on the profit outlook and believe it is unlikely that we get any other significant news in the statement given that the company fully updated the market at the time of its full-year results a month ago.”