One of the notable aspects of the recent UK recovery has been the divergent performance of the general retail sector in the UK as opposed to the food retail sector,
Over the past twelve months retail sales in the UK have performed notably well helped in no small part by the decline in inflation as well as the price wars for market share that UK supermarkets are embarking upon in an attempt to shore up their market share.
The woes of the UK supermarket sector have been well documented over the last two years as their lunch has been slowly eaten by the new kids on the block of Aldi and Lidl
It was only two months ago that Tesco (LONDON:TSCO) somewhat belatedly became the latest of the big four supermarkets to address the changing shopping habits of the UK consumer by slashing £7bn of costs from its balance sheet.
Sector peer J Sainsbury (OTC:JSAIY) PLC (LONDON:SBRY) announced its own cost cutting plan over a year ago and though it posted its first annual loss in a decade in March was quick to identify some of the problems in the sector at a fairly early stage, a year ago.
According to data released earlier this month expectations for this week’s trading update are for margins to come under increasing pressure with some of the more bearish estimates suggesting a 2.5% fall in like for like sales for the past three months.
This could well be overstating things, but certainly Tesco and Sainsburys are facing challenges as Morrisons became the latest supermarket to announce wide spread price cuts earlier this week on 200 basic food items, in reaction to the increased influence of disrupters Aldi and Lidl.
Over the past 12 months the share price performance of all three has been negative with Sainsbury’s the worst performer, down over 30%.
The strong rally that we had seen in the early part of this year on all three has also started to peter out, with Morrisons shares back in negative territory year to date. Tesco and Sainsburys have just about managed to hold on to some of their gains since the turn of the year, but it is slowly becoming apparent with the continued pressure on prices and increased competition that the battle for market share is likely to remain a drag on profits throughout the rest of the 2015.
Contrast the performance of the food retail sector with that of the general retail sector and the divergence is stark.
Recognisable brand names like Zara, owned by Inditex (MADRID:ITX), Marks and Spencer (LONDON:MKS) and Next have outperformed despite increasing competition from retailers like TK Maxx and Primark.
Inditex shares are up over 30% over the last 12 months and even the performance since the beginning of the year has been significantly positive, up over 20%, which has no doubt been helped by not only the improvement in the Spanish economy, in the first part of this year, but also in Europe as whole. The lower euro will also have played a part, along with a highly flexible logistics chain that turns over stock very quickly.
With annual sales of €18.1bn and 6,500 shops in over 80 countries the shares are just shy of all-time highs.
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