January 10, 2018 / 10:53 AM / 9 months ago

Breakingviews - Sainsbury’s is proxy for UK retail’s split fate

LONDON (Reuters Breakingviews) - Foodies saved Christmas at Sainsbury’s. The supermarket’s grocery business had a better festive season than its clothing and general merchandise. UK consumers, stung by high inflation, are spending less on non-essential items, but still need to eat. That means grocers are better able to pass on rising prices to shoppers.

A shopper browses items at a Sainsbury's store in London, Britain October 11, 2016. REUTERS/Neil Hall - LR1ECAB11Q47H

Sainsbury’s third-quarter results highlight how the UK’s vote to leave the European Union and resulting sterling depreciation are changing consumer spending. Food sales were strong as shoppers stocked up for Christmas. Demand for everything else, from clothing to electrical goods, was slow – disappointing for a group that spent 1.4 billion pounds on Argos-owner Home Retail Group in 2016 to diversify away from its core grocery business.

That trend will see the fate of food and non-food retailers diverge. Britain’s biggest supermarket, Tesco, reports its numbers tomorrow, but signs from smaller rivals such as Morrisons are that grocers have had a good Christmas. The mood on the high street is less rosy, with Debenhams, Mothercare and Moss Bros all issuing profit warnings since the New Year after several weeks of weak trading.

Food, being less discretionary, is more insulated from the spending slowdown. And supermarkets will probably benefit if consumers eat at home to save cash. That means grocers are better able to pass on higher costs linked to the pound’s 2016 devaluation to shoppers. Fresh food inflation is currently 2 percent according to data from the British Retail Consortium. Granted, customers are offsetting price hikes by buying more of Sainsbury’s cheaper own-label products. But the pressure from discounters such as Aldi had already forced supermarkets to shift more sales to low-cost in-house produce.

The high street is still heavily discounting stock to stimulate spending. Prices of non-food goods were down 2.1 percent year-on-year in December. That is particularly painful for, say, clothing retailers who must import up to half of everything they sell according to Office for National Statistics data. Supermarkets are less exposed to higher sourcing costs, importing a third of, say, fish products and buying everything else locally. If consumers continue to spend cautiously, non-food retailers will be the biggest casualties.

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