With improved price stability, suppliers - and retailers - may promote less, says Clive Black


Earlier this year we donned our Mystic Meg outfits and predicted that the deep discounters' momentum would peak. In subsequent months, market share data has indeed slowed, taking a major scalp with it, as Aldi replaced its chief. Emboldened by our predictive success, we have got the old purple frock out again and polished the crystal balls. What do we see...?

Amid the purple smoke and flashing lights, our next prediction is that the promotional bandwagon of British food retailing has peaked. Promotions have been remarkable during this recession, allowing retailers to portray good value to consumers while supporting both supplier and shopkeeper margins.

Promotions have been so vast that shoppers have become somewhat detached from understanding Known Value Item pricing due to the extent of activity, so helping to trade protect margin. So is the consumer punch-drunk on promotions, is the trade killing the golden egg? Additionally, are one or two retailers becoming concerned by promotional activity so prioritising other trading mechanisms? And will manufacturers have a narrower margin fat layer to spread around the promotional market over the next six to 12 months?

Our thinking here is that in a time of food inflation, suppliers, particularly tier one proprietary branded ones, recover the cost increases (and more). Thereafter, as input prices fall they maintain case prices but, with improving cost of goods ratios, provide value to the retailer, particularly in recession, through promotions.

Now there is more stable pricing in Britain, easing food inflation, set against some creeping upward input price movement internationally. With price stability and the gross margin gap narrowing for the suppliers, will they be as supportive of promotions? Or with possibly less support for promotions from suppliers, will the retailers take up the slack to maintain activity levels?

On both counts, we suspect not. We see promotional activity easing back from recent highs. If we are correct, such an easing back will benefit the retailers with the strongest base pricing files (Asda and Tesco) and maybe make shoppers less promiscuous as there will be fewer deals to chase, rewarding those with good loyalty records.

Putting the cloak and ball back in the magic wardrobe for now. We'll revisit in six months or so to see what became of our predictions.

Clive Black is head of research at Shore Capital Stockbrokers.

More Opinion