Credit quality in the UK grocery sector is likely to be eroded by 'high inflation and intense competition' over the next 12 to 18 months, a new report from Moody's has claimed.
The report, 'Cost savings needed to avoid credit quality erosion from inflation and competition', said that the biggest grocers in the market will be likely able offset rising labour and energy costs by finding new cost savings elsewhere.
In addition, while the sales shift to online and convenience will continue, it is unlikely to be able to help companies improve their credit quality that much, Moody's said.
Rise Of The Discounters
Continued product price inflation will 'increasingly benefit discounters', Moody's said, with the discount channel set to continue to take market share from traditional grocers over the coming year.
With declining incomes forcing consumers to buy fewer, cheaper items, the discount channel has the most to gain – traditional supermarkets are also seeking to keep prices low, however 'this is pressuring their already thin operating margins', Moody's said.
Cost Saving Opportunities
In terms of areas in which traditional grocers may seek to achieve cost savings, Moody's identifies 'internal efficiency measures' as a key tool to enable them to 'maintain their price gap with the discounters and keep profits broadly stable'.
With this in mind, Tesco is poised to do better than most, it adds, 'thanks to its significant scale advantages and greater opportunities to cut costs'.
Market Consolidation
According to Moody's, market consolidation could help to stem market share losses and credit quality erosion, as well as reduce excess capacity within the sector.
'We do not expect competition rules to change in the next 12 to 18 months, but the distinction between the different formats and channels is blurring,' it noted. 'However, given the state of debt capital markets, we do not expect any large debt-funded M&A in the grocery sector any time soon.'
The report was authored by Moody's analysts Roberto Pozzi, Danh Nguyen-Thanh and Richard Etheridge.
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