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Moody's predicts continued shrinking profit margins for UK's big four grocers

Published:  20 October, 2014

Moody's, one of the biggest international credit rating agency, predicts that Tesco, Sainsbury's, Asda, and Morrisons will see continued to see dwindling profit margins over the next 12 to 18 months.

Moody's, one of the biggest international credit rating agency,predicts that Tesco, Sainsbury's, Asda, and Morrisons will see continued to see dwindling profit margins over the next 12 to 18 months.

SupermarketThe UK's big four retailers face continuing shrinking margins, says Moody's

Moody's report "UK Big Four to Suffer Further Margin Declines as Discounters Take Bigger Slice" indicated that the increased market share of discounters such as Aldi and Lidl is attracting more customers and footfall, which is a contributing factor to declining sales of the larger retailers.

Also the pressure for the big grocers to try and compete on a price comparison basis with the discount retailers, is biting into margins as traditional retailers dip into their own margins as the battle over pricing intensifies.

Sven Reinke, Moody's vice president and senior analyst said: "Further price cuts could be particularly credit negative for Tesco and Morrisons as their cost cutting and efficiency measures are unlikely to fully offset the negative impact of lower prices on their margins."

However, the report does predict that Morrisons is better positioned than some of its competitors, including Tesco and Sainsbury's, to adapt the rapidly changing and fiercely competitive retail market.  Due to its cost structure and to the relatively few superstores it has over 50,000 square feet, Morrisons is least exposed to the decline in footfall.

Also the investment that Morrisons has made in its digital store, which opened in January of this year, and its distribution systems, "may also be more scalable if online growth continues as expected," according to the report.

According to the British Retail Consortium (BRC) and KPMG retail figures released last week, UK retail sales were down 2.1% on a like-for-like basis from September 2013. The figures are the weakest performance since December 2008, the beginning of the global financial crisis.  

The BRC-KPMG report said "over the last three months, Food showed a decline of 1.7% and reported its first twelve-month average decline in at least five years, at -0.2%".

David McCorquodale, head of retail at KPMG, which collaborated with BRC for the report, said: "The grocers had another challenging month, with further price cuts and promotions announced by most."

Currently, Moody's has put Tesco on review for a downgrade of its debt after Tesco announced in September that it had overstated its profits by and estimated £250 million. Tesco is set to release a statement about its findings following an independent review of its financials this week. The fallout of the overstatement of profits has seen eight executives suspend, including Tesco's head of beer, wine and spirits, Dan Jago.