UK big four supermarkets’ margins to shrink further, says Moody’s

Over the next 12 to 18 months, the profit margins of Britain’s ‘big four’ supermarkets are likely to shrink further, says Moody’s Investors Service in a Special Comment report “UK Big Four to Suffer Further Margin Declines as Discounters Take Bigger Slice”. The UK’s large supermarkets are struggling with fierce competition from Germany’s cheaper Lidl and Aldi. A battle they appear to be losing.

The ‘big four’ supermarkets include: Morrisons Supermarkets plc (Baa2 negative), Asda (Aa2), J Sainsbury (unrated) and Tesco plc (baa2, being reviewed for downgrade).

Moody’s Vice President and report author, Sven Reinke, said:

“Further price cuts could be particularly credit negative for Tesco and Morrisons as their cost cutting and efficiency measures are unlikely to fully offset the negative impact of lower prices on their margins.”

Big Four Supermarkets

The ‘Big Four’ supermarkets are losing market share to the two German discounters.

Morrisons outlook better

According to the report, Morrisons is better equipped to adapt than Sainsbury or Tesco, through cost structure and store portfolio adjustments, to the rapidly changing environment in which discounters have gained a greater market share.

Morrisons has a higher percentage of smaller supermarkets and very few outlets that are more than 50,000 square feet in size (the most exposed to falling footfall).

Morrisons also has a centralized distribution network, making it more scalable if online shopping continues growing as expected.

Lidle and Aldi

The two German discount supermarket chains: Lidl Stiftung & Co. KG is based in Neckarsulm, Baden-Württemberg, and ALDI Einkauf GmbH & Compagnie, oHG has one HQ in Essen (Aldi Nord) and another in Mülheim an der Ruhr (Aldi Süd).

Moody’s expects Lidl’s and Aldi’s combined market share to increase from 8.3% today to 10% within the next two years. Their combined UK market share could become similar to the 12% to 15% seen in the rest of Europe.

Moody’s forecasts a slowdown in the two discounters’ 20% to 30% annual growth rate in like-for-like sales in the UK. However, some of this slowdown will be offset by new store openings. Intense pressure on the ‘Big Four’ will continue.

To access the report you need to be a Moody’s subscriber.

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