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Rising prices and falling volumes have already sparked a warning from Morrisons
Thursday 07 Apr 2022 Author: Ian Conway

On 13 April Tesco (TSCO), the UK’s largest supermarket chain by market share, is set to release its results for the year to the end of February 2022.

There is likely to be more attention on the outlook for the current year rather than on what happened last year.

Consensus forecasts compiled by the company are for revenue including fuel sales to reach £61.2 billion, an increase of 5.7% compared with £57.9 billion the previous year, and for operating profit to recover to £2.8 billion against £1.7 billion.

Much of the increase is expected to be down to higher food and fuel prices rather than volumes, and it should be said the range of estimates for both sales and earnings is quite wide.

Analysts are forecasting a sharp slowdown in revenue growth to just 1.4% this year, implying sales of £62.1 billion, while profit is seen flat at £2.8 billion.

Research firm Kantar recently reported that food price inflation at the supermarkets reached 4.2% in the 12 weeks to March 20 and 5.2% in the preceding four weeks, the highest rate since April 2012.

At the same time, total supermarket sales for the 12 weeks were down 6.3% on the previous year.

That means in volume terms sales were down more than 10%, which is a major concern for the supermarkets.

Significantly, own-label products made up more than 50% of all grocery spending for the first time as shoppers traded down.

Meanwhile, discounters Aldi and Lidl saw their sales increase by 3.6% each meaning they took a record 15% share of the market.

The Government has forecast retail price inflation could hit 9% later this year, which combined with national insurance changes and a huge jump in fuel bills could see living standards fall sharply.

This week, supermarket chain Morrisons, now owned by private equity firm CD&R, warned its sales and profits could be hit as shoppers face a ‘cost of living crisis’.

The company said it was taking mitigating action but cautioned ‘unless these conditions improve, the impact of these developments could have a material adverse impact on our sales and profits for the year’, which we take to be a thinly-veiled profit warning.

Shore Capital’s head of research Clive Black suggested Morrisons was lagging the sector in terms of sales and investors shouldn’t be too perturbed by its comments.

‘We still see a UK grocery market where there are favourable economic traits: compound annual value growth that exceeds new capacity, rational behaviour in the main, value added streaks in the food system, scope for ongoing cost reduction, capital discipline by the superstore players and so strong free cash flow generation’, Black concluded.

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