There’s been a seismic shift in how the UK grocery sector looks, and operates. The takeover of wholesaler Booker by Tesco (TSCO) transformed Britain’s largest supermarket’s supply chain and added significant scale to its existing convenience estate. This year, the consolidation could continue, if regulators give the thumbs up to another high-profile deal – namely the potential merger between rivals J Sainsbury (SBRY) and Asda. The tie-up still requires approval from the Competition and Markets Authority (CMA) which, having identified several geographic areas where competition could be diminished as a result of the deal, has pushed the merger into a second-phase investigation.
Assuming the deal does get approved in some form, that leaves Morrisons (MRW) – the last constituent of Britain’s ‘big four’ – rather out in the cold. Despite logging its fourth Christmas of consecutive growth, and a rise in like-for-like sales of 3.6 per cent over the nine weeks ended 6 January 2019, the company warned of the sector's fierce competition. Indeed, continued market share gains by German discounters Aldi and Lidl have already prompted the company to slash prices on hundreds of products this year. Sainsbury’s echoed these sentiments in its own Christmas trading update, once again observing the food retail sector's “highly competitive and very promotional” state.
But it isn’t just increasing levels of competition that have investors on edge. The food segment fell victim to the general retail malaise that took hold towards the end of 2018, despite its strong performance during the first half of the year. Exactly what caused this slowdown remains open to debate, but analysts at Shore Capital believe the uncertainty currently gripping the UK – much of which hinges on the country’s upcoming exit from the European Union – has led to a slump in consumer confidence. The GfK consumer confidence index fell to a five-year low at the end of December, surpassing even the sharp drop in sentiment in the wake of the 2016 referendum.