Brexit uncertainty could raise UK food costs - but discount supermarkets may still win

By Natalie Morrison

- Last updated on GMT

Photo: iStock
Photo: iStock
Brexit-borne economic uncertainty could dampen supermarket’s ability to offer cheaper groceries, though worried shoppers could maintain sales figures at hard discounting retailers like Lidl and Aldi, analysts suggest.

With roughly 40% of the food consumed in the UK imported from overseas, any long term change in exchange rates may “threaten the current period of cheaper groceries,”​ said Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel, which this week produced its latest grocery sales figures​. Previously, it was reported​ that market fears over Brexit have been driving up the cost of food.

However, despite potential rise in costs, consumers are unlikely to steer away from groceries in the face of economic uncertainty.

This is particularly true for discount retailers known to offer cheaper goods than other supermarkets, such as Lidl and Aldi, or for sales of own-label products which tend to rise in popularity in the face of higher prices, the analysts note.

Though the data was collected in the 12 weeks leading up to 19 June 2016 – prior to the UK’s EU referendum ‘Leave’ result – it shows Lidl and Aldi’s combined market share has hit a record high of around 10.5%.

“Historically, higher prices have led to consumers looking for less expensive alternatives such as own-label products, seeking out brands on promotion or visiting cheaper retailers.”

Kantar’s data also shows that 58% of the UK population visited either Aldi or Lidl during the 12-week report period. Lidl increased its sales by 13.8% year-on-year, grabbing a total 4.4% of the market, while and Aldi saw sales boosted by 11.5%, totalling a 6.1% share of the market.

Mintel’s director of research EMEA, Toby Clark, said uncertainty tends to cause consumers to hold back on spending, as seen before the Scottish independence referendum and the 2015 general election. However, he said that grocery spending is unlikely to be effected drastically by Brexit, in the short term at least.

“For most people, life goes on. They still need to buy groceries, they’ll still be heading to the pub to watch Euro 2016, and they’re still going to be taking their summer holidays. In the short-term at least, everyday spending is unlikely to change dramatically.”

Slipping sales

The data shows that sales for the UK grocery market in general – particularly for the big four – have dipped for the first time since January. Supermarket sales fell by 0.2%, the analysts note.

That is despite the fact that UK supermarkets in general have slashed grocery prices again in the first half of 2016 by 1.4% year-on-year.

Big retailers were the worst hit in terms of sales dips, including Tesco with a 1.3% drop, Morrisons which was down 2.4%, Sainsbury’s which suffered a 1.4% decline. Of the big four, Asda was the worst hit with a 5.9% drop. Each lost market share compared to 2015.

McKevitt said: “The decline is a continuation of the slow supermarket sector growth dating back to summer 2014, primarily a result of cheaper everyday groceries brought about by a retailer price war.”

Yet, he pointed out that the most recent economic uncertainties brought on by Brexit may not pose a big problem to supermarket sales in general. Basic food, drinks and household sales sectors proved resilient during the 2008 financial crisis, he said, adding it is unlikely the latest economic uncertainties are therefore unlikely to substantially impact grocery volumes.

In any case, the analysts said the sales dip was not seen by some of the smaller retailers including the Co-Op, which grew 2% and maintained a full year of increasing sales. Waitrose also increased sales of its premium Waitrose 1 brand, which bolstered general growth by 1.3%.

Waitrose has the best growth run outside of the discounter supermarket bracket, with an unbroken period of increasing sales from 2009, the team note.

Discounter European takeover

The trend for discount supermarkets taking increasingly bigger market shares is echoed throughout Europe. As in an economic crisis, the discounters have the potential to wait long periods for profit margins to become positive in new markets because of their sheer mass, experts said.

Discount supermarkets are now branching out into the remaining European market which have no low cost supermarkets. Lithuania is one example where Lidl this month opened its first 15 branches and became the first of the low cost supermarket chains in the country.

In 2015, Lithuania was one of the last European countries with no discounters at all, Jekaterina Smirnova said in her Euromonitor blog​.

Lidl is not the first of the discounters to try its hand at the Lithuanian market, with others including Supernetto and Cento entering and leaving the market before now. Previous discounters were unsuccessful because – unlike Lidl -- they focussed on low pricing with lack of marketing and assortment, Smirnova told FoodNavigator.

Lidl also has a huge purchasing power compared to the other discounters which attempted Lithuania, she said, noting they can sustain loss for a long time and simply have the negotiating power with suppliers to guarantee cheap purchasing prices thanks to the incredibly high volumes.“

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