Co-op’s physical expansion palliative for squeezed food sector

Comment Martin Flanagan

Whatever else happens in 2018, I think any marked change in the fortunes of the supermarket sector will be a wild goose chase. Inflation might have peaked, but it could be well into the new year – if at all – before there is even a hope of parity with anaemic average earnings.

And squeezed consumers are unlikely to accept any overt move by the major food retailers to repair their strained profit margins.

The supermarkets simply don’t have many arrows in their quiver. The likes of Tesco, Sainsbury’s, Asda and Morrisons have probably also already squeezed their suppliers as far as they can.

Dave Lewis at the Tesco helm and his counterpart at Morrisons, David Potts, have burnished their corporate credentials by getting like-for-like sales back in positive territory, but there is a limit to how many efficiencies one can squeeze out of an organisation and that has been a key element in those groups’ return into the City’s good books.

Even with a relative recovery last year, comparatively weak sterling won’t do the industry many favours, either, as the cost of imported ingredients and products stay high.

What’s left, then? Well, perhaps something old, something new. The Co-op’s expansion drive in terms of new stores (for the third year running) announced today follows the Aldi and Lidl model of chasing rising total sales on a larger UK footprint if like-for-like sales – the City’s preferred crucible – comes under renewed pressure.

A nascent new factor in the market is diversification; spreading the risk. Sainsbury’s has widened its offering with the purchase of homewares business Argos. Tesco has got the regulatory go-ahead to take over wholesaling giant Booker.

The Co-op’s purchase of Nisa – which still needs regulatory approval – shows the attraction of the remaining corner shop chains for the bigger players, particularly ones such as Tesco, Sainsbury’s and Waitrose with their own convenience store offerings.

The supermarkets are not out of options, but given the competitive trading environment there may be a pervasive sense in 2018 that they are in a resilient defensive sector whose trolleys are still having to run hard to stand still, to possibly differing degrees.