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Moody's warns of more margin and market share misery for multiples

Published:  11 June, 2015

A warning that supermarket margins face more pressure from price deflation in the months ahead has been made by a leading credit rating agency.

Moody's Investors Service said that it expects the big four supermarkets' share of grocery retail to fall by 4% by 2020, with discounters Aldi and Lidl taking a larger slice as they continue to open new stores.

It said that Tesco, Sainsbury's, Asda and Morrisons were unlikely to recover over the next 12 to 18 months due to "further price cuts and ongoing like-for-like sales declines".

Sven Reinke, Moody's vice president and senior analyst, said: "We expect Aldi and Lidl's combined share of the UK market to reach 12%-15% by 2020.

"Although the discounters' sales densities have caught up with the big four retailers, Aldi and Lidl could continue to gain around 1% market share every year supported by their store expansion plans at a time where the big four selectively close unprofitable stores in order to save costs.

"However, the UK's economic growth, rising real wages and improving consumer sentiment could support the Big Four's gradual recovery from fiscal 2016/17."

The impact of the discounters has been acutely felt in the wines and spirits aisles of supermarkets, with downward pressure on prices reflected in deep promotional discounts.

Tesco has made cuts to both its buying team and the number of wines it stocks after last year's financial dramas.

Sainsbury's announced a first quarter sales decline just this week and recorded its first loss in 10 years in 2014/15.

Kantar Worldpanel data has recently shown Morrisons returning to growth but also confirmed the march of the discounters with Lidl taking its highest ever market share in the UK.

Moody's said in its report that there was "a risk of an intensifying price war if the big four are not able to develop strategies to operate successfully with lower market shares".

It added: "With the exception of Asda, none of the other three players have the capacity to engage in many more rounds of price cuts as they have limited financial capacity to absorb further margin declines."

Morrisons confirmed to Harpers some BWS lines are among 200 price cuts on everyday items that it announced this week.