Equity analyst James Monro predicts price war in Food Retail Sector and takes cautious view on General Retail Sector
James Monro, equity analyst for S&P Equity Research, said:
"We believe that 2010 will see a greater price war between the UK food retailers than ever seen before. The UK tends to be very rational and UK food retailers have always competed with each other, but this has historically been at a comfortable level with players not wanting to cut off their nose to spite their face.
“Europe, however, follows a different set of rules with continental European players more willing to compete on price to gain market share at the expense of EBIT. This is due to a higher level of hard discounters and private labels and has been intensified by a continued low inflation environment.
"We now believe that the UK is poised to follow Europe's example, with an economy at tipping point, and fears mounting around a year of weakening consumer confidence, reflected in recent corporate updates from both food and non-food retailers.
“The main event of the year will be the General Election, with the probability of a change in Government likely to result in large public sector cuts. Mounting pressure to reduce the UK's budget deficit is likely to lead to higher interest rates, and the potential for tax hikes, making the scenario of a double-dip recession towards the beginning of 2011 a possibility.
"Consumers increased spending in Q4 to have a 'normal' Christmas as has been evidenced by the strong performance reported by M&S. In our view, weakening consumer confidence will be witnessed in the early part of this year when consumers look to tighten their belts and brace themselves for more negative news.
“For this reason, we believe price points and product range will be of importance to consumers and companies such as Tesco's are likely to emerge as the UK Food Retailers winners in 2010.”
Following results from General Retailers John Lewis, Next and M&S and ahead of results from retail group Kingfisher, which includes household brands such as B&Q, James Monro has begun to take a cautious view on the General Retail sector.
He said: "This view is based on the expectation of interest rate increases and the risk of further rises in unemployment (namely public sector cuts), post-election (May/June).
A likely change in government could result in all the above, which would negatively impact consumer sentiment; although a longer Labour government term could cause increased inflation (which may benefit retailers). In mitigation, at present the sector remains inexpensive on c.13x FY 10 P/E multiple."
