City snapshot: Fall in grocery inflation eases and retailers cut promotions

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The fall in grocery price inflation eased last month as retailers “took their foot off promotions”, while sales growth lagged price increases.

According to Kantar, the rate of overall food price inflation was broadly flat, edging down to 6.8% in January from 6.9% in December.

This softer decline compares with a 2.2% point decrease seen between November and December 2023.

Meanwhile, take-home grocery sales grew in value by 2.9% over the four weeks.

Fraser McKevitt, head of retail and consumer insight at Kantar, explains: “All eyes are back on inflation again, after the Consumer Prices Index’s (CPI) unexpected jump earlier in the month.

“There has been a lot of speculation about the impact the Red Sea shipping crisis might have on the cost of goods, but the story in the grocery aisles this January is more about the battle between the supermarkets to offer best value, rather than geopolitics. Retailers have taken their foot off the promotions gas slightly as we’ve come into the new year, and that’s meant inflation hasn’t fallen as quickly.

“Items bought on offer accounted for 27% of all grocery spending in January versus 32% last month. Christmas is always a bumper period for deals and the grocers pulled the price lever especially hard in December, as they sought to get shoppers through their doors. However, there are still plenty of opportunities for consumers to make savings. The overall trend in offers is up versus this time last year, and nearly £500m more was spent on offers this January than in the same month in 2023.”

Lidl was the fastest growing grocer in Britain for the fifth month in row and the only retailer to see double-digit growth in the latest 12 weeks. Spending at the discounter was up by 11.9%, bringing its share of the market to 7.5%. Aldi also grew ahead of the market, with sales up by 7.2%.

Notably Sainsbury’s sales growth topped that of Aldi, with Sainsbury’s sales up 8.1% to take 15.7% of the market, 0.3% pts higher than last year, while the UK’s largest retailer Tesco grew by 6.3% and now has a share of 27.6%, up from 27.5%.

Sales at Morrisons rose by 2.8%, Asda by 2.1% and Waitrose by 3.5%. Co-op sales were up 1.8% in the month and Iceland by 2.3%.

Online sales rose by 6.3% in the latest 12 weeks, slightly ahead of Ocado’s growth where spending was 4% higher than last year.

With inflation remaining stubbornly high, Britons are changing their behaviour to better manage their costs. McKevitt commented: “There’s evidence to suggest that people are opting for more homemade meals to keep budgets in line – 86 million more lunchboxes were brought to work last year, for example.”

Shoppers have trimmed down in more ways than one this month. As consumers across the country took on Dry January, spending on alcohol fell by more than half compared with December.

Sales of own label plant-based ranges increased by 8% on the month, as Veganuary got underway.

McKevitt added: “Health always comes to the fore as a priority for consumers in January, but what’s interesting this month is that we’re not seeing as big a spike in health-related categories as we have done in previous years. That’s because people are now buying more of the typical January ‘health kick’ items throughout the year. Nine per cent of annual own label plant-based sales were made in January in 2023, a steady decline compared with the 11% of sales in 2020.”

Over the longer 12-week period, food price inflation was 7.3% for the 12 weeks ending 21 January 2024.

Prices are rising fastest in markets such as sugar confectionery, ambient cooking sauces and chocolate confectionery, and are falling fastest in butter, milk and toilet tissues.

Morning update

Diageo has reported a drop in full year net sales due to a significant drop in sales in Latin America and Caribbean, and weaker sales in North America.

The spirits giant reported net sales of $11bn, which was down 1.4% or $158m due to a $167m unfavourable foreign exchange impact and an organic net sales decline of $67m.

The net sales decline was largely down to a $310m or 23% decline in Latin America and Caribbean due to strong comparator numbers from last year and lower consumption given macroeconomic pressures in the region.

Excluding the impact of LAC, reported net sales grew $72m or 0.7%, and organic net sales grew $243m or 2.5%, driven by Asia Pacific, Africa and Europe, partially offset by a $64m 1.5% decline in North America which improved sequentially from the second half of fiscal 23.

Reported operating profit declined 11.1% to $3.3bn and reported operating profit margin contracted 329bps due to lower organic operating margin and a negative impact from exceptional operating items.

Organic operating profit declined by $205m or 5.4%, of which $234m was attributable to LAC as organic operating margin contracted 167bps.

Excluding the impact of LAC, organic operating profit grew by 0.9%, and organic operating margin contracted 53bps, driven by increased marketing investment.

Debra Crew, CEO, said: “The first half of fiscal 24 was challenging for Diageo and our sector, particularly as we lapped strong growth in the prior year and faced an uneven global consumer environment. Excluding LAC, our group organic net sales grew 2.5%, driven by good growth in Europe, Asia Pacific and Africa. While North America delivered sequential improvement in line with our expectations, we are focused on returning to high-quality share growth as consumer behaviour continues to normalise in our largest region.

“As previously announced in November 2023, materially weaker performance in LAC, driven by fast-changing consumer sentiment and high inventory levels, significantly impacted total business performance. Having conducted a review of inventory levels and monitored performance in the critical holiday season, we have taken action and have further plans to reduce inventory to more appropriate levels for the current consumer environment in the region by the end of fiscal 24. This is a key priority.”

Elsewhere, travel retail specialist SSP Group has update the market on the three months to 31 December, with its first quarter of its financial year “starting well”.

Group sales in the first quarter were up 21.2% to £788m on a constant currency basis.

Like-for-like sales growth of 14.3% reflected the further recovery of passenger numbers as well as “the strength of our customer proposition and operational execution”.

Net contract gains of 6.9% were in line with expectations and included a contribution from acquisitions of 2.2%.

Since the close of the first quarter, SSP said it has continued to see good trading momentum, notwithstanding the impact from industrial action which is expected to persist in both Continental Europe and the UK throughout the second quarter.

Regionally, it said it saw robust trading led by leisure travel demand across all regions with the strongest performances continuing to be in North America and APAC & EEME.

In North America, sales grew by 30.5% year on year, on a constant currency basis, with a strong like-for-like performance, up 10.2%, complemented by net gains of 20.3%, which included a 10% benefit from the acquisition of the Midfield Concessions business.

In Continental Europe, sales grew by 13.3% year on year, on a constant currency basis, with a particularly strong performance in Spain.

In the UK, sales increased by 22.8%, with a strong like-for-like performance, up 17.1%, reflecting good passenger numbers in the air sector and further improvement in rail passenger volumes as commuters continued to return to working in offices, as well as a lower incidence of industrial action compared with last year.

Looking ahead to the second half of its financial year, despite continued global economic volatility, SSP Group expects to deliver improvement in organic net sales and organic operating profit growth compared to the first half.

CEO Patrick Coveney said: “I am pleased with the good start that SSP has made to the new financial year. There continues to be encouraging momentum in our key growth markets of North America and Asia Pacific and we have also delivered double-digit like-for-like growth in our more established markets of the UK & Ireland and Continental Europe.

“Global demand for travel continues to grow and we have a strong pipeline of secured new contracts around the world. This, combined with our constantly improving customer proposition and our proven ability to mitigate inflationary pressures, means we remain confident in our prospects for the balance of FY24 and beyond.”

Finally, pet retail group Pets at Home has reported “resilient” demand, but below its expectations.

Its third quarter consumer revenue was up 6.0% on last year and 15.4% on a two-year basis, supported by growing average customer spend and growth in active VIP members, up 2% year to year to 7.7 million.

Overall group revenue was up 4.3% in Q3 to £362.4m, with group like-for-like revenue up 4.4%.

Retail saw Q3 revenue up 3.5% and LFL up 3.7%, resilient against very strong performance last year, however this growth fell below the company’s expectations.

“We were pleased to see volume growth and share gains across food, against a slowing market backdrop, showing the business remains fundamentally well positioned,” it stated. “However, discretionary accessories trends remained soft and inflation across retail slowed to 3.2% (from 5.6% in Q2).”

Overall gross margin performance improved sequentially from the first half, with strong sell through of seasonal ranges meaning the group exited Q3 with a clean inventory position.

Given growth in retail was not at the levels expected, the group now expects 2024 underlying profit before tax to be £132m, which assumes no sequential improvement in its retail business as it trades against a period of exceptionally strong trading last year.

CEO Lyssa McGowan commented: “Our colleagues came together over our peak trading period to deliver a record sales performance, growing against a very strong performance in the prior year. While a slower market over peak meant our sales growth didn’t quite hit the levels we expected, the business remains well positioned to benefit from long term growth in the sector as we continue to win share and grow volumes across food and deliver differentiated performance through our unique vets business.

“Importantly, we will shortly follow up launching our new distribution centre with the launch of our new digital platform, in line with our target. Our new digital platform is a key foundation of our growth strategy, bringing vastly improved user experience to our consumers, and creating opportunities to improve cross-sell into accessories and further grow share of wallet. With these foundations now in place we are well positioned for the future.”

On the markets this morning, the FTSE 100 is up 0.5% at 7,671.9pts.

Risers include SSP Group, up 2.8% to 231.8p, Compass Group, up 1.5% to 2,182p and WH Smith, up 1.4% to 1,223.4p.

Fallers included Virgin Wines, down 2.5% to 37p, Diageo, down 3.2% to 2,749.5p and Deliveroo, down 5.2% to 115.6p.

Yesterday in the City

The FTSE 100 ended the day broadly flat after gains last week, closing at 7,632.7pts.

Risers yesterday included PayPoint, up 2.1% to 547p, C&C Group, up 1.7% to 152.8p, Naked Wines, up 1.7% to 66.1p, Coca-Cola Europacific Partners, up 1.2% to 63.75p, British American Tobacco, up 0.9% to 2,355p, Haleon, up 0.9% to 320.7p and Greencore, up 0.6% to 103.2p.

Fallers included Glanbia, down 3.3% to €14.80, Hilton Food Group, down 2.5% to 797p. Wynnstay, down 2.3% to 325p, Pets at Home, down 2% to 293p, Ocado, down 1.8% to 565.6p and WH Smith, down 1.5% to 1,206p.