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Economic home truths writ large in woes of supermarket chains

MUCH has been made in recent times of intensifying competition in the food retailing sector, as the rise of the discounters takes its toll on the big supermarket chains.

Tesco has not had its troubles to seek. And Wm Morrison Supermarkets has been struggling. Sainsbury had been holding its own, under soon-to-depart chief executive Justin King. But Sainsbury this week reported its long run of year-on-year, like for like, sales growth, which had extended to 36 quarters, had ended. The supermarket group, which appears to have benefited from an upmarket positioning that does not lose sight of value and goes under the "live well for less" banner, reported on Tuesday that sales in the fourth quarter of its financial year, the 10 weeks to March 15, were down 3.8% on the same period a year earlier.

Asda, backed by the clout of US giant Wal-Mart, has appeared well positioned in these difficult economic times but has been focusing on price cuts amid the fierce competition.

There has been a great deal of analysis of supermarket groups' strategies. Decisions relating to the timing and extent of moves into convenience stores, online channels, and non-food retailing have all been studied in great detail by analysts.

This is understandable. After all, it has become an increasingly fascinating battle, particularly with the recent success of the discounters.

What is even more interesting, and is sometimes overlooked or underplayed in all of this, is the real driving force behind this competition.

Food retailers have always had to battle for the pounds in consumers' pockets.

However, the intensification of competition is being fuelled not so much by the retailers as by consumers, who appear to be cutting back increasingly on food shopping as this grim era of austerity drags on.

Amid the tough economic backdrop, continuing declines in real incomes, and swingeing cuts in welfare provision by the Coalition Government, these reductions in household food budgets are in many cases being driven by necessity.

Anyone who is in any doubt about this need only look at the demand being experienced by food banks.

The Glasgow City Mission food bank ran out of supplies recently. And Network Rail last week organised a huge collection of food supplies for the charity at Glasgow Central Station.

In other households where decisions are not being driven by necessity, people appear to be choosing to trim their food budgets as they attempt to square the household finances and prioritise spending, as freezes or paltry rises in pay remain commonplace.

The value of food sales north of the Border fell in February at the fastest year-on-year pace since comparable records began in January 1999, excluding distortions relating to the timing of Easter, according to a survey this week from the Scottish Retail Consortium.

David McCorquodale, retail sector expert at accountancy firm KPMG, noted on the back of this survey that price cuts announced recently by food retailers would filter through in future months to the benefit of the consumer, but at a cost to retailers and their suppliers in terms of profit margins.

Chancellor George Osborne may have been in triumphant mood when he delivered his fifth Budget on Wednesday, flagging up the Office for Budget Responsibility's upgrade of its 2014 UK growth forecast to 2.7%. But this mood sits most incongruously with that in many households.

Mr Osborne's tone was also out of tune with comments yesterday from prominent Conservative supporter Lord Wolfson, chief executive of retailer Next. Lord Wolfson warned that credit-driven growth in consumer spending could not go on forever.

The Next chief voiced concerns about what would happen when borrowing costs rose, citing specifically the potential impact on people in south-east England who had borrowed money against their homes.

Boosting the housing market has been a key part of Mr Osborne's economic strategy in recent times, as the 2015 General Election looms.

Respected consultancy Capital Economics has declared that the "meagre" giveaway to consumers in the Budget has done little to change the reality that fiscal policy will impart a moderate squeeze on households' incomes in coming years.

And a survey published yesterday by price comparison website uSwitch.com showed 53% of people in Britain had been forced to reduce their spending on food in the last 12 months.

None of this is good for food retailers. They can continue to battle with each other for market share, and this will make some difference in terms of their own performances.

But, whatever they do, pressure on household finances will likely continue to cause people to cut their food budgets. This will ensure that competition remains fierce and that retailers' profit margins continue to come under pressure.

It is difficult to see what, in the short term, might ease things for consumers and, in turn, food retailers.

But it is easy to see what could make things worse, given the intensifying fiscal squeeze signalled by Mr Osborne if the Conservative Party wins the next election and expectations that base rates will start rising from their record low of 0.5% next year.

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