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Supermarkets face new pressures despite online boom
Supermarket sales eased in August as the sector begins to eye a key festive period which could be blighted by new coronavirus restrictions and a weak consumer backdrop.
The brightest star in the groceries firmament continues to be Ocado (OCDO) which despite some teething problems bucked the somewhat downbeat backdrop to report (15 Sep) a strong start for its joint venture with Marks & Spencer (MKS).
The successful launch also spared Marks the embarrassment of being the only major food retailer without an online delivery service earlier this year when the shift to an internet-based weekly shop started to accelerate.
Ocado’s switch on 1 September from offering Waitrose products to now having M&S food and drinks has driven an increase in the number of products in customer baskets and prompted strong forward orders.
Success for the M&S tie-up gives Ocado more room to focus on the technology area of the business which generates most excitement for investors. Its Ocado Smart Platform solution is aimed at supermarkets around the world looking to launch or augment an online delivery arm. Since Ocado secured its first international client in June 2017 the shares are up 686%.
UK sector data from market research outfit Kantar on 15 September showed growth in supermarket sales slowed markedly in August compared with July.
Some of this was attributed to the impact of the Eat Out to Help Out scheme which encouraged more people to venture out to restaurants rather than cooking meals at home.
According to Kantar, supermarket sales were up 10.8% year-on-year in the 12 weeks to 6 September 2020 but up just 8% in August – the slowest rate since April 2020.
Online grocery sales were up 77% year-on-year in the four-week period to 6 September – although they have dropped back to 12.5% of total sales from a peak of 13.5% in August.
The impact the recently-introduced ‘Rule of Six’ might have on Christmas gatherings and the gloomy economic outlook are potential headwinds for the sector.
On 10 September Morrisons (MRW) received an unfavourable market reaction as it announced plans for price cuts alongside its first-half results as it looks to tailor its offering to a customer base which is feeling the pinch.
However, Shore Capital analyst Clive Black is positive overall about the supermarkets’ prospects in the wake of the pandemic. He says: ‘The industry’s strategic relevance and reputation has been enhanced by its behaviour through the coronavirus crisis whilst the online channel has migrated from marginally loss-making to profit.
‘Challenges and uncertainties persist – Covid, recession, UK-EU, Christmas with six – but we feel more confident about positive operational gearing, liquidity and solvency, free cash generation, ongoing dividend declarations and more.’