30 August 2016 Europe/United Kingdom Equity Research Food Retail Pricing: Rarely as it seems Research Analysts THEME Stewart McGuire, CFA 44 20 7888 6531
[email protected] An in-depth look at UK pricing and inflation Dusan Milosavljevic 44 20 7888 7751 We have undertaken a broad analysis on product pricing and sourcing. Our
[email protected] goal is twofold: address many of the inherent flaws found within traditional Specialist Sales: Lindsay Ireland pricing surveys, and contribute hard data to the ongoing debate regarding 44 20 7883 6895
[email protected] inflation after recent sterling weakness. Our analysis reveals the following: ■ We expect almost no impact from sterling devaluation: UK own label sourcing falls within a narrow range of 63% to 75% amongst the 7 major food retailers. These differences would narrow further once branded goods and non-food items are factored into the overall assortment. ■ Sterling weakness is unlikely to affect Aldi / Lidl growth: Both Aldi and Lidl are naturally hedged due to their British-based sourcing. Overall, both retailers came in slightly below the group average for UK sourcing, but both were in the top 3 in the important Meat and Produce categories. ■ Tesco appears most at risk from rising import costs: Tesco scored lowest on our UK-sourcing basket at 63% vs. the group average of 71%. However, Tesco is naturally hedged from sterling weakness due to its international operations (22% of group sales, 29% of EBIT). ■ The convenience premium is much higher than anticipated: Tesco and Sainsbury convenience store prices were between 4.4% and 8.7% higher than their supermarket prices.