Leading the pack by a good margin

“It was the best of times, it was the worst of times…” starts Dickens in A Tale of Two Cities. And it sounds like retailing at the moment.

Part of retailing is growing profits 11% this year and the rest’s profit is falling 11%. Which is which? Well, of course, it’s the food retailers that are winning and the general retailers that are suffering. So why are the grocers having such a good time, while everyone else is being put to the guillotine?

Purchases of clothing, furniture, entertainment and electricals can all be deferred but food is one of life’s essentials. GDP may be declining, but we all still need to eat. Indeed maybe calorie consumption is growing because many need comfort food just to survive the gloom.

The top 10 listed general retailers are not expected to grow their sales at all this year.

But meanwhile the big three listed food retailers are increasing sales 12% despite this deep recession. How?

Well, the food market is still growing, helped by food inflation; grocers are still sucking in more non-food market share; and the big four continue to take food share off smaller players. Business as usual then.

However, what is surprising is that they are not having to compete more aggressively on price and sacrifice gross margin to achieve this. While the big players are driving sales and profit so effortlessly (apparently), why should they drive down their margins? So much for the impact of the rise of the discounters: a heady mix of store openings and PR that obscures 16 years of minimal effect.

It wasn’t so different in the last deep recession of 1991/92. Tesco’s, Sainsbury’s and Safeway’s net margin all rose during this period, peaking in 1993. Struggling Asda was different of course, with falling margins. However, as the economic recovery came, a domino effect started to happen.

Asda’s profit fell before and during Archie Norman’s initial phase of moving it back to its low-price roots, which, together with the arrival of the discounters, frightened the industry into cutting prices in 1994/5.

Grocery net margins then fell over the next few years and this set the trend for the premium operators Sainsbury’s and Safeway, that struggled for the next decade.

So will the food retailers face their own mini-downturn again at just the time that non-food is starting to recover? There isn’t now the catalyst of a new discounter threat, or an Asda cutting prices. Moreover, Tesco seems happy to cede like-for-likes, building more stores both in the UK and abroad to compensate.

It sounds all too good to be true, at least for the grocers. Scant comfort though for the general retailers cutting prices to try to minimise their sales declines, yet still suffering that ominous march to the scaffold.

Simon Laffin is an independent retail adviser and non-executive director