Tough start to 2005 for British retailers
of the Safeway takeover ending with victory for Morrisons, a
startling decline in fortunes for Marks & Spencer and Sainsbury
and the continuing domination of Tesco. And 2005 looks likely to be
as much of a rollercoaster, with poor Christmas trading figures
leaving many companies with a hangover which may be hard to shake
off. Chris Jones reports.
All the leading UK supermarket groups are yet to report on their Christmas performance, but early indications are that the season was far from festive for many of them.
Marks & Spencer, whose management will undoubtedly be glad to draw a line under 2004, looks likely to face more uphill struggles in 2005, with Christmas trading continuing to underline the group's increasingly precarious position.
Total sales in the six weeks to 1 January were down by 5.6 per cent on the same period in 2003 on a like-for-like basis, with food sales dropping 1.7 per cent, and this despite two major Christmas promotions.
The food business, which had struggled in October and November, picked up somewhat in December, but the group's overall performance prompted yet another profit warning from the beleaguered group, which now expects to earn around £600-625 million in fiscal 2004-05.
The problem for M&S is that it is trying to turn its business around in a market where conditions are not conducive. Data from the British Retail Consortium shows that retail sales (food and non-food combined) dropped by 0.4 per cent in December compared to the previous year, "the worst Christmas for a decade".
Food sales, normally buoyant in the run up to Christmas and expected to be even moreso this year because of the extended holiday period (which effectively consisted of a four-day weekend), were largely disappointing, in particular in produce and grocery. Only the usual promotional offers on beer, wines and spirits, and Christmas luxuries such as Stilton cheese and poultry proved successful.
For the Big Food Group, which trades as Iceland and Booker, the poor performance at Christmas was due to the same factors that impacted sales throughout 2004. In the five weeks to 31 December, BFG's sales declined by 3.5 per cent on a like-for-like basis, with a 3.1 per cent drop at Iceland and a 4.6 per cent fall at Booker, due to "a trading environment increasingly characterised by grocery price deflation and increased competition in the convenience sector", according to the company.
Morrisons, meanwhile, posted a like-for-like increase of 0.1 per cent for the 6 weeks to 9 January, one of the few companies to experience an improvement on the previous year's Christmas figures, albeit sleight and well below the 9.6 per cent like-for-like increase in Christmas sales recorded a year earlier. Taking into account the newly-acquired Safeway business, the group lifted sales by 31.9 per cent.
But Morrisons' performance was well below expectations: analysts Goldman Sachs forecast like-for-like sales growth of 5.2 per cent for the core Morrisons stores, excluding Safeway. Even including fuel sales (which the G&S forecast did not), Morrisons fell well short of expectations with growth of 4 per cent. The reason for the sluggish performance was "a combination of competitors new store openings, some cannibalisation resulting from Safeway conversions, one less trading day and aggressive couponing activity by others to support the relaunch of stores which we were required to divest," Morrisons said in a statement.
However, where Morrisons performed much better than, say, M&S was in its stock control. The clothing and food retailer ended the year with large quantities of unsold stock - even after its two pre-Christmas promotional days - and this was simply transferred to the sales, significantly reducing its profits. Morrisons, on the other hand, had "minimal carry over of seasonal stocks, particularly when compared with the residues experienced by Safeway 12 months ago".
Sainsbury's, which is due to announce its Christmas trading figures later this week, also struggled with stock control, with around 20 of its London-based stores left without any fresh produce over the Christmas period following a fault in the group's forecasting system.
As a result, Goldman Sachs' forecast of 1.1 per cent growth in like-for-like sales for Sainsbury's in the third quarter (including Christmas) seems somewhat optimistic, especially in light of the over-estimation for Morrisons. GS is also predicting strong Christmas sales growth for Tesco (which will issue its trading statement next week) of 7.7 per cent (based on seven weeks), based on the group's "very powerful volume sales, notably from the ongoing capture of share in non-food".It is not only supermarkets affected by the poor Christmas performance. Northern Foods, the leading UK supplier of own-label products to multiple retailers, also saw its Christmas sales hit by the downturn, in particular at M&S which accounts for a third of its sales.
Sales for the 13 weeks to 1 January were up 1.3 per cent overall and 2.3 per cent at the top five clients (M&S, Tesco, Asda, Sainsbury's and Morrisons), although this was down from increases of 5.6 per cent and 4.5 per cent a year earlier and in spite of a 17 per cent increase in sales of mince pies, the traditional British Christmas favourite.
It was the poor chilled food performance at M&S which hit Northern the most, with sales falling £7 million short of expectations and lopping £3-4 million of the groups' profits as a result. The decline prompted yet another downward revision of profits to £80 million, well below the £86 million registered in 2003/04 and the consensus analysts' forecast of £88 million.
