A Tesco profit warning is causing collateral damage in food retail: inflation and competition are causing margins to evaporate, in a market that is falling back to ‘normal’ sales after the Covid pandemic. Belgian market leader Colruyt is in the eye of the storm, while Ahold Delhaize remains confident.
The British market leader released exceptionally good figures on Wednesday: Tesco’s sales and market share increased, profit even tripled. But the devil was in the detail: that party will not last, CEO Ken Murphy admitted. He outlined a very delicate set of circumstances: food retail is engulfed in a quasi-perfect storm.
The war in Ukraine and strong inflation are weighing down consumer confidence, while buying behaviour is normalising again – meaning that supermarkets have completely lost their ‘bonus’ from the lockdowns. While all costs are going up like never before and suppliers are demanding rate increases, passing these increases on in full to shoppers is not an option. Competition – especially with Aldi and Lidl – is far too fierce for that. You do the math…
Competition weighs on margins
In short: supermarkets have no choice but to pay part of the inflation out of their own pockets. As a result, profit margins will be a lot lower this year. And if Tesco says so, then it inevitably applies to its competitors and colleagues as well. At least, that is what the investors assume: Colruyt in particular has been hit hard again on the stock exchange. This is logical: the Belgian market leader guarantees the lowest prices and is therefore very reluctant to raise them.
But that costs a pretty penny: last year it became clear that price competition seriously affects the margins, because Colruyt has to respond to every price initiative of every competitor. And competitors know that too: the targeted attacks by challenger Albert Heijn hit the discounter where it hurts. Both retailers look each other in the eye and keep the price increases limited for the time being. Competitors such as Delhaize and Carrefour can pass on price increases somewhat more easily.
Private labels are an asset
Should the difficult context not weigh on the margins of Ahold Delhaize as well? Analysts expect so, especially in the European stores – but CEO Frans Muller is convinced that the group will still manage to maintain an operating margin of at least 4 % this year, he told the shareholders meeting this Wednesday. Given the circumstances and compared to the margin of 4.3 % in the previous financial year, that would be a strong performance.
How will Muller achieve this? In the United States, which accounts for 60 % of sales, higher prices will affect sales less: price elasticity is lower there and the energy crisis is less of an issue. In Europe, the consequences of the war are felt more strongly, but Ahold Delhaize has the costs well under control. This partly comes courtest of the fact that half of its sales consist of private brands, meaning the retailer is doing better than many of its industry peers – and that is an added advantage in times of inflation.