While the UK's biggest supermarket operators have seen sales soar over the past 12 months, they will 'find it difficult' to improve their credit quality due to tough competition and the continued strength of the discounters, Moody's has said.
In a report, Credit quality improvement unlikely as old battle with discounters resumes, Moody's said that the UK's 'Big Four', namely Tesco, Sainsbury's, Asda and Morrisons, have generated most of this sales increase online, where margins tend to be lower for traditional bricks and mortar operators.
'Sales soared for most UK supermarkets in the past 12 months because restaurants, bars and offices were closed and families cooked and drank more at home,' said Moody's. 'However, this has not translated into higher profit nor improved credit ratios for the Big Four.
'More sales have moved online, where margins are lower. Grocers have also had higher costs in the past year as they put in place measures to protect staff and customers and hired and invested to expand their online operations.'
It pointed to Tesco as an example, with the retailer reporting an increase in sales in the year to February 2021, along with a 28% decline in operating profit, due to COVID-related costs.
Elsewhere, Morrisons reported like-for-like sales growth of 8.6% in its financial year, however profit before tax and exceptional more than halved, to £201 million (from £408 million a year earlier), again related to costs associated with the pandemic.
While Moody's expects these exceptional costs to reduce over the next 12-18 months – and leverage ratios to return to levels similar to 2019 – margins are likely to remain 'stable at best'.
'The benefits of planned cost cuts will be offset by the incumbent supermarkets' need to keep prices low to remain competitive with the discounters and maintain market share,' Moody's said, noting that price is likely to remain the focus for consumers in the medium term.
'Grocers in the middle of the price and quality range like Sainsbury’s will struggle most to preserve their margin.'
Moody's added that the UK marketplace remains 'crowded', with Ocado and B&M European Value Retail among the retailers gaining market share – plus, the sector is likely to get even busier if Amazon scales up its UK food business presence.
'As the pandemic recedes, we expect consumers to largely resume their normal ways of shopping, looking for the best possible combination of price and quality,' it said. 'This will once again favour the discounters, if they can maintain their edge over the traditional grocers.'
There was also a note on sustainability measures being taken by UK operators, with Moody's suggesting that the limited progress being achieved in terms of reducing plastic usage likely to lead to higher regulation in the long term.
Approximately half of the 1.8 million tonnes of plastic used in the UK was generated by the ten largest supermarkets, it said, approximately the same amount of plastic as two years ago.
'The sheer scale of the problem suggests that government regulations will need to get much stricter, increasing compliance costs for supermarkets and their suppliers,' said Moodys. [Pic: ©Alenakr/123RF.COM]