The latest interest rate hikes will have affected shoppers' spending and for multiples offering non-food items, sales may start to wobble

Tesco's share price has come under severe pressure in the past fortnight. Its comments at the trading update have been taken badly by the market and the worries about consumer confidence outlined by the industry bellwether have also caused non-food retailers to wobble too.

So why is the outlook suddenly looking grim?

There is no doubt in my mind that the interest rate hikes (there will probably have been another one since we went to print) have started to have an impact on shoppers.

Mortgage payments have been rising and with a large number of two-year, fixed-rate deals about to expire, households will be keeping a keen eye on their outgoings.

For the food retailers, this would normally only have a limited impact. Everyone has to eat and other luxuries are the first to go. But the big grocers have evolved, and there is now greater risk to them for two reasons.

The UK consumer has been trading up for two years into tastier, healthier but more expensive foods. And some of the superstores are now making a large amount of profit from non-food. I think the healthy trend is here to stay. People are increasingly concerned with how they look and their wellbeing and they'll continue to spend to improve their diets.

The pressure will therefore increase on the spend available to non-food retailers. At Tesco and Asda, non- food items make up about one fifth of sales. That number is much less elsewhere. Tesco is right to be concerned and with interest rates still going up, non- food sales will continue to be under a cloud for everyone.

The weather hasn't helped. Have you been to a barbecue yet this year? Me neither. This time last year we were drowning our World Cup sorrows in the sunshine. So comparatives are tough on the food side too.

The industry leader has justification for its cautious remarks. The food ­retailers face tough trading conditions, but not so tough that good companies cannot thrive.

That said, the grocers should thank their lucky stars that they're not pure play clothing or electrical retailers. Fashion-wise, nothing has really caught the imagination this year and as far as the electrical retailers go, they've got some pretty tough World Cup comparatives to contend with, having sold endless flat screen TVs last year. Life may be tough for the grocers, but it could be worse!n

Jonathan Pritchard, Partner, Oriel Securities

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