Blackfriar: Supermarkets hit as household budgets feel the squeeze

At the time he had a point. The Bank of England’s decision to slash interest rates meant homeowners were far better off.

Today, with base rates still at 0.5 per cent and many of us still fortunate enough to have kept their jobs, why is life is so much harder than it was?

Over one million more households say they are worse off now than a year ago, according to Legal & General’s latest MoneyMood survey.

Legal & General estimated that 11.5 million homes, around half of all households in the UK, are in danger of sinking into debt.

Over half of households questioned are considering eating into their savings to meet mortgage payments or pay higher food and fuel bills.

It’s not just people getting made redundant who are suffering in the current climate. People in part-time or casual work are seeing their hours slashed and demand fall off a cliff.

Those still in work have had wages frozen or increased at a rate far lower than inflation.

With household spending accounting for two-thirds of gross domestic product, the trend for thrift will add to fears about Britain’s fragile economy.

All this spells a difficult time ahead for UK supermarkets, which until now have appeared impervious to the slowdown in consumer spending.

Looking at Tesco’s results yesterday it appears the big problem is that non-food spending has been hammered.

Tesco said non-food sales had slumped by nearly five per cent. For a retailer that relies on non-food for more than 10 per cent of its UK sales, this is bad news.

Out of all the big four retailers, Morrisons is likely to be the best off. It must be very glad it decided against a big non-food roll-out, which was one of the options considered when chief executive Dalton Philips arrived on the scene early last year.

In fact Morrisons’ decision to focus on its own-brand food relaunch this week looks like a sensible move. People just can’t afford to spend money on gadgets, CDs and games.

A switch away from non-food could be a sensible move in a climate which is showing no signs of improvement.

This is also the conclusion of ratings agency Fitch, which said yesterday that UK food retailers must adjust to the changing structural competition and challenging economic environment.

Fitch points out that over the past decade, UK supermarkets have enjoyed constant organic revenue growth as a result of solid consumer confidence, consumer credit availability and their capacity to roll-out new stores in a non-saturated market.

Today competition is more intense than ever and Fitch claims that consumers are more discerning, requiring healthy but low-price food and more choice.

“With the economic slowdown and high unemployment rates affecting consumers’ purchasing power, UK food retailers are now at a turning point,” Fitch said in its latest report.

So what can supermarkets do to expand in such dire circumstances?

While Tesco looks in poor shape because of its reliance on non-food sales, a quarter of its profits now come from overseas. In this respect it actually looks to be in a much healthier state than its rivals.

The ongoing gloom for the UK retail climate means that supermarkets will have to look at new revenue streams.

If they can’t go abroad, the likes of Leeds-based Asda, London-based Sainsbury’s and Bradford-based Morrisons will have to come up with new business models. Of the three, only Morrisons has plans in place to enter new markets – in its case convenience stores and internet retailing. Asda and Sainsbury’s must be very worried.

Regional airline Flybe’s frank revelation that sales of UK flights slowed “significantly” in December shows the all-pervasive effect of the slump in consumer confidence.

It resulted in the airline’s second profits warning this year, wiping a third off its market value. Flybe added winter forward sales are weak.

“It is too early to determine whether the September slow down in sales on our UK domestic routes is a short-term reaction to the turbulent macro-economic environment, or whether this is a longer-term market adjustment,” said the carrier, which flies from Leeds Bradford and Robin Hood Doncaster Sheffield.

Flybe’s likely medicine will be trimmed schedules and capacity. Already it has axed its London Gatwick to Leeds link, and other cuts will surely be announced, resulting in reduced connectivity in the regions.

This will be bad news for business, but Flybe isn’t solely responsible – it can’t be expected to fly half-empty planes.

Blackfriar bets there are a few investors who regret backing its IPO last year.