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Fitch: UK Supermarkets Face Power Balance Shift With Suppliers
November 20, 2014 / 3:37 PM / 3 years ago

Fitch: UK Supermarkets Face Power Balance Shift With Suppliers

(The following statement was released by the rating agency) LONDON, November 20 (Fitch) Falling sales for the UK's big four supermarkets in the face of rising competition from hard discounters will accelerate the decline in the sector's profitability and change the power balance between UK retailers and some of their suppliers, Fitch Ratings says. Sales data from Kantar Worldpanel released Tuesday points to intensifying competition in the UK ahead of the crucial Christmas trading period, with price cuts helping to drive the first drop in total sales in at least 20 years. Discounters Aldi and Lidl continued to grab market share from bigger rivals, recording double-digit sales increases while sales at Tesco, Sainsbury, Morrison and Asda all fell. The data confirm that the UK food retail sector faces cyclical and structural challenges as price deflation and competition accelerates and consumer habits change, preferring value and convenience as well as dining out. Large hypermarket formats are out of favour with the UK shopper. We expect negative like-for-like sales to continue for the established UK players. We believe the structural changes affecting the profitability in the sector and the move towards more transparency in food origin and quality are also starting to affect the industry's supply chain and this will alter the balance of negotiating power between retailers and those food manufacturing groups that enjoy "must-have" brands and high quality products. Over the last decade large UK supermarket groups have put heavy pressure on suppliers to reduce purchase prices or offer discounts and rebates on purchases. Other tactics have included charging suppliers for promotional campaigns and even for displaying goods on premium eye-height shelf space. This has been possible due to the oligopolistic position of large food retailers within the industry. The recent trend may partially shift the balance of power as supermarkets continue to review and adapt their ranges in line with the changing consumer preferences. This could put pressure on smaller/regional suppliers, such as Premier Foods (B/Negative) who might be required to share some of the margin reduction as well as giving supermarkets greater incentive to invest in private label ranges as these offer greater control over profitability and lower scope for direct price comparisons. However, major suppliers like Nestle (AA+/Stable), Unilever (A+/Stable) and The Coca Cola Company (A+/Negative) have own brands that are universally recognised by consumers and hence we believe they might well be able to regain some market power vis-a-vis food retail groups, as competition in the market increases and the oligopolistic industry structure weakens. These companies are sufficiently large to be able to negotiate successfully, often on a global scale, as they produce food ranges and brands that the customers prefer and want to buy, some of which are increasingly available in discounters as well. They have also demonstrated greater cost flexibility than retailers. We highlighted this trend among others for the sector in our recent special report "What Investors Want to Know: EMEA Retail and Fast-Moving Consumer Goods," published earlier in November and available from www.fitchratings.com. Contact: Frank Orthbandt Director Corporates +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Ching Mei Chia Director Corporates +44 20 3530 1068 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: What Investors Want to Know: EMEA Retail and Fast-Moving Consumer Goods here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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