City snapshot: Grocery sales growth slows as food price inflation eases

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Supermarket sales growth slowed to 5.3% during February as food price inflation continued to fall.

The 5.3% growth in February compares with 6.6% in January, according to NIQ, with the slowdown primarily driven by food inflation falling to 5% during the month.

The drop in food inflation has been aided by a rebound in supermarket promotions, with 24% of all fmcg sales bought on promotion and rising to 35% for branded items.

Sales of supermarket own-label goods also increased to 16% compared with 13% last year.

NIQ data also reveals that online channel growth (7.9%), remains ahead of in-store (3.8%) with the online’s market share up to 11.2% compared with 10.8% this time last year.

However, despite February being the warmest and wettest on record in the UK, NIQ data shows shoppers increased their in-store visits (0.9%) compared with last year.

In terms of retailer performance over the past 12 weeks, Ocado (+12.2%) was the fastest-growing retailer followed by M&S (+11.9%), while sales momentum at discounters Lidl (+10.4%) and Aldi (+6%) continued to slow. Sainsbury’s (+8%) and Tesco (6.8%) both experienced an increase in market share with slower growth at Morrisons (+3.6%) and Asda (+2.0%).

NIQ also identified a number of key category trends so far in 2024. The first is shoppers buying convenient meal options which is reflected in strong growth in the past four weeks for prepared fresh meat products (+13%), frozen chips (+13%), cooking sauces (+7%) The second key trend is cheaper meal ingredients; rice & grains (+13%), canned veg (+10%) and frozen poultry (+8%). The third is a shift towards healthier snacking with growths in dried veg & pulses (+23%) and fresh prepared fruit (+7%).

And finally, the fourth key trend was events. With Pancake Day taking place in February, there was also a rise in sales for baking ingredients such as baking mixes (+24%), flour (+18%), eggs (+16%), golden syrup (+29%), and chocolate spread (+27%) during the week ending 17 February.

Mike Watkins, NIQ’s UK head of retailer and business insight, commented: “Whilst industry volumes remain positive, many brands are now chasing growth having lost category share during the high period of inflation and are keen to communicate their own value among consumers.

“We expect the levels of promotion to continue to creep up over the next few months. Brands are also going to be important to sustain the recovery in fmcg spend and with Euro 2024 and Paris Olympics on the horizon, branded promotions will be the drivers of increased discretionary spend post Easter.

“The resilience of online grocery shopping during the highest period of inflation in decades, when household penetration fell a little, is due to the changed lifestyles of consumers. When food inflation was in double digits, shoppers did cut back on large ‘trolley’ shops and online was also impacted.

“Whilst this growth is now against a weak comparative (–2.5%), it is also a normalisation of shopping behaviour for the one in four households who continue to shop this channel every four weeks and suggests that omnichannel shopping in food retail is here to stay.”

Morning update

Separately the BRC-KPMG retail sales monitor has found that retail sales were dampened by the wettest February on record last month.

UK total retail sales increased by 1.1% year on year in February, against a growth of 5.2% in February 2023, which dipped below bother the three-month average growth of 1.4% and below the 12-month average growth of 3.1%.

Food sales increased 6% year on year over the three months to February, against a growth of 8.3% in February 2023.

Non-food sales decreased 2.5% year on year over the three-months to February, against a growth of 3.2% in February 2023. For the month of February, non-food was in decline year on year.

In-store non-food sales over the three months to February decreased 2.3% year on year, against a growth of 8.1% in February 2023, while online non-food sales decreased by 4.1% year on year in February from a decline of 3.1% in February 2023.

BRC CEO Helen Dickinson said: “Consumer demand was dampened by the wettest February on record, translating into a poor month of retail sales growth. Not even Valentine’s Day lifted customers out of the gloom, and gifting products that typically sell well, like jewellery and watches, failed to deliver. On the sunnier side, rainy weather did brighten sales of toys, as parents looked for ways to occupy their children indoors.

“With consumer confidence and demand remaining weak, government must find ways to stimulate the economy. Retailers have some government-induced cost hurdles to jump in the coming months, including a £400m business rates rise based on last September’s 6.7% inflation rate. By using Wednesday’s budget to reduce this, the Chancellor will lend a helping hand to much-needed investment in businesses and local communities up and down the country.”

Linda Ellett, UK head of consumer markets, leisure & retail, KPMG, added: “Cuts in national insurance rates designed to put more money in people’s pockets have so far failed to translate to a boost to consumer spend on the high street, with retail sales growth in February recording a limp 1.1%.

“Health and beauty categories continued to drive sales both on the high street and online, whilst sales of home and dining accessories received an unexpected boost last month, as consumers moved from buying clothes to buying cushions and cooking items. With food inflation slowing, sales of food and drink remained strong at 5%, but this was slightly down on January’s figures.

“As many households continue to adapt budgets to meet higher essential costs, including higher mortgage rates, consumer reluctance to get out there and start spending is likely to remain in the short term. With big increases in labour costs and business rates just weeks away, adding to an already stressed cost agenda for retailers, many will be pinning their hopes on some good news in the Chancellor’s spring budget this week to help kick-start a spending revival on the high street.

“As inflation continues to slow over the coming months and household finances are expected to improve, there is some light at the end of the tunnel for weary households. However, the assumption that having more spending power will lead to more spending isn’t cutting through at the moment, and retailers will continue to face significant downward pressures on demand in the months to come.“

IGN CEO Sarah Bradbury said: “The UK grocery market saw sales and volumes both increasing from last year, with February the third month in a row where volumes were in year-on-year growth. However, although sales were also up on last year, they were down compared to the previous month. This is the fifth month in a row this has occurred, and the trend is likely to continue as inflation leaves the market.

“Following news that the UK entered a technical recession over the festive period, shoppers were feeling slightly less positive in February than they were in January. However, confidence levels didn’t slip as far as they could have, with the promise of lower energy bills on the horizon and indications that the recession could in fact already be over playing a role here.”

On the markets this morning, Greggs posted a double-digit hike to sales and profits in 2023 as new store openings and like-for-like growth boosted the food-to-go player.

Total sales grew 19.6% to £1.8bn in 2023. Within this, company-managed shop like-for-like sales were 13.7% higher than the equivalent period in 2022.

Like-for-like sales volume growth remained strong through the year whilst the element relating to pricing reduced as it annualised against price increases made in May and October 2022.

Growth was boosted by a record 220 new shop openings in 2023 and 75 closures (145 net openings), growing the estate to 2,473 shops as at 30 December 2023.

It also relocated 42 existing shops and refurbished 122 existing shops.

Meanwhile, it continued to expand partnerships with retailers including Primark, Tesco and newest partner Sainsbury’s, while its London presence extended including new shops in Canary Wharf and Waterloo railway stations and Gatwick Airport.

Sales were also supported by the expansion of evening trading, with more than 1,200 sites competing for food-on-the-go-sales until 7pm or later.

It also extended its delivery reach and is now available on Just Eat (1,340 shops) and Uber Eats (930 shops) platforms (1,440 shops in total) with sales up 23.6% in 2023.

Underlying pre-tax profit for the year increased to £167.7m from £148.3m, an increase of 13.1%.

The overall level of cost inflation in 2023 averaged 8.5% for the year but with an exit rate closer to 5%.

Looking forward, the group currently expects overall input cost inflation in 2024 to be in the range of 4%-5%, although an element of this remains subject to geopolitical risks.

Greggs said it had started 2024 well, with like-for-like sales in company-managed shops growing by 8.2% in the first nine weeks.

CEO Roisin Currie commented: “Reflecting on another year of rapid growth, I am so proud of how our teams have risen to the challenge of serving more customers through more channels. Whether in our shops, our manufacturing sites, our distribution network, or in Greggs House, our teams stepped up to make sure that we kept pace with the increased customer demand as we delivered on our strategic growth plan.

“We are very much on track to deliver our bold five-year growth plan to double sales by 2026 and to have significantly more than 3,000 shops in the UK over the longer term.”

Also this morning, Bakkavor has negotiated a “challenging” fresh prepared food market to post annual growth and flat profits.

Like-for-like revenue increased by 5.7% to £1.85bn last year, with reported revenue, which includes the impact of a 53rd week in 2022, up 3.9%.

Growth continued to be led by pricing as inflationary pressures persisted.

However, the group said it outperformed the market, which saw a 2.2% decline in volume compared to its own reduction of only 0.5% year on year.

A combination of collaborative pricing discussions with customers, and a November 2022 plan to protect profits, enabled it to successfully mitigated ongoing inflationary headwinds.

This resulted in adjusted operating profit being up £1.2m to £93.9m, with margins broadly flat at 5.1% from 5.2% last year.

Operating profit of £96.7m includes exceptional income of £2.8m (compared with a £36.6m expense last year) related to the release of provisions previously held for restructuring activity, and therefore was up £42.1m from £54.6m.

If fresh prepared foods, shoppers are focused on centre-of-plate products and ‘good value’ purchases as a reaction to the persistent cost of living pressures.

The desserts category was the least resilient because of its more discretionary nature. It was also a category which saw more inflation passed through given the raw material mix and reduced promotions due to the new high fat, salt and sugar legislation.

The group also outperformed the market in salads, though as a category it was negatively impacted by shopper behaviour.

Meals was a more resilient category and performed better than the wider market, with consumers switching from eating out and takeaway options to at-home dining alternatives.

The pizza and bread category also continued to see volume growth during the year, predominantly driven by ‘value’ ranges and meal deals as consumers, again, moved away from the more expensive takeaway and restaurant options.

Bakkavor said that in the UK, while it was planning for subdued growth in 2024, it has a strong pipeline of new business opportunities and are seeing encouraging signs in the market.

Volumes have started growing again since Q4 2023, on the back of reducing inflation, a general pick-up in consumer confidence which has led to an increase in shopping frequency.

Internationally, it expects a return to growth in the US in late 2024 and moderate growth in China.

Overall, 2024 adjusted operating profit is expected to be at least in line with upper end of market expectations.

CEO Mike Edwards said: “I am proud of the group’s performance, which has been delivered ahead of expectations. I would like to thank everyone at Bakkavor for their energy and commitment in embracing our clear plan to drive change, which has made our business stronger than ever.

“We have momentum in all three regions and have started the year well. This gives us confidence that we will deliver 2024 at least in line with the upper end of market expectations, and we will be relentless in looking for further opportunity to improve our business.

“We will continue to put our colleagues and customers at the heart of everything we do, whilst also making a meaningful contribution to our wider communities, with a specific focus on giving our full support to the King’s Coronation food project, which targets a reduction in food poverty.”

Finally this morning, consumer card spending grew just 1.9% year on year last month – significantly lower than the latest CPIH inflation rate of 4.2% and the smallest growth since September 2022.

According to data from Barclays, face-to-face retail (excluding groceries) was a major contributor to this slowdown, contracting 2.2%, as shoppers spent more time at home.

Reassuringly, concerns about inflation, rising food prices and increasing household bills eased, while confidence in non-essential spending reached a two-year high.

Essential items saw less growth (2.3%) than in January (4.2%), with lower prices at the pump leading to a fall in fuel spending (–12.2%).

Food price inflation dropped to its lowest level since April 2022, at 7.0%*, which contributed to supermarkets (3.9%) and food and drink specialist stores (2.7%) seeing lower uplifts than in January (both 5.2%).

The deceleration in food inflation has helped ease concern about rising grocery prices. While still high at 84%, this is the lowest figure recorded since Barclays started tracking this data point in December 2021.

Two-thirds (66%) of shoppers are still looking for ways to get more value from, or to reduce the cost of, their weekly shop.

To save money, two-fifths (42%) of this group have cut down on supermarket impulse buys, while a third (32%) is stocking up on their favourite or essential products when they are on offer. A further quarter (25%) is sticking to basic ingredients or cupboard staples – such as pasta, rice and vegetables – to prepare simple, cheaper meals at home.

Spending on non-essential items increased just 1.7% in February – the lowest growth since September 2022 – as wetter weather cast a cloud over multiple sectors and shoppers spent more time indoors.

More nights in led to a disappointing month for restaurants, contracting 13.4% (vs 11.6% in January), while growth in spending at bars, pubs and clubs was at its lowest level (1.1%) since September 2022.

Karen Johnson, head of retail at Barclays, said: “February’s wet weather meant shoppers chose to spend more time indoors, resulting in a slowdown in high-street and hospitality spending. This shift in behaviour meant insperiences enjoyed a boost, as consumers opted to enjoy cosy nights in with a TV show and a takeaway.

“At the supermarket, the majority of shoppers have noticed the impact of supply issues on stock, with tea shortages causing the most concern. Meanwhile, ‘drip pricing’ has topped the list of shopper bugbears, particularly when using food delivery services and buying airline tickets.

“With shoppers having reined in discretionary spending during the winter months, and as inflationary pressures begin to ease, retailers will be hopeful that the onset of warmer weather lifts spending – particularly if consumer confidence improves in the summer.”

Jack Meaning, chief UK economist at Barclays, said: “We have continued to see encouraging signs of slowing price growth so far in 2024, particularly in the retail sector. Recent data shows shop price and grocery inflation decelerated significantly in February, as retailers offered shoppers discounts and promotional offers.

“This will be a welcome reprieve for consumers, and a probable explanation of last month’s subdued card spending growth: while many people will have taken advantage of recent price promotions, they look to have held back on spending at least some of what they saved elsewhere.”

On the markets this morning, the FTSE 100 has dropped another 0.4% to 7,606.9pts.

Risers include Glanbia, up 4.3% to €17.80, Bakkavor, up 3.1% to 99p and Greggs, up 2.5% to 2,782.6p.

Fallers include Wynnstay, down 2.5% to 378p, Just Eat Takeaway.com, down 2.1% to 1,185p and Nichols, down 1.8% to 1,031.6p.

Yesterday in the City

The FTSE 100 started the week down 0.6% at 7,640.3pts ahead of the spring budget this week.

Fallers yesterday included Ocado, which fell 6.5% to 445p amid reports it could be in dispute with Marks & Spencer over the financial terms of its UK retail joint venture.

Also falling were online contemporaries Just Eat Takeaway.com, down 4.4% to 97.5p and THG, down 3.2% to 60.9p.

Other fallers include PZ Cussons, down 4.2% to 97.5p, Pets at Home, down 2.5% to 270.2p, Haleon, down 2.1% to 323.3p, Marks & Spencer, down 1.8% to 230.2p and British American Tobacco, down 1.7% to 2,294p.

The day’s risers included Deliveroo, up 4.3% to 117.8p, Naked Wines, up 2.2% to 65.8p, Nichols, up 1.5% to 1,050p, Hilton Food Group, up 1% to 822p, Fever-Tree Drinks, up 0.9% to 1,178p and Britvic, up 0.7% to 864p.