OPINION: Disposable income falling, say analysts

The job of retail analysts is to advise investors on where to place their money and their views underpin much of the media coverage of the retail sector. In the wake of the latest Asda income tracker figures that show disposable incomes falling by 6 per cent in July, Dave McCarthy of Evolution Securities said that a tough era lies ahead for the UK food retailers, “for which the industry is not well prepared”.

In the UK, retailers have benefited from like-for-like sales growth which has driven the way that companies have funded their business models. Many stores are taking less cash than a year ago and facing real increases in costs, says Mr McCarthy. The result is a profits squeeze.

The managers of Tesco, Sainsbury’s, Morrisons and Asda have benefited from two dynamics for a long time. In the past two decades, one has always been under-performing. Now they are all doing the same suppliers will find less need to pay to shift their sales around an “undifferentiated pack”.

Secondly, consumers have been trading up for 30 years to products that are more processed and to products sourced from overseas. As disposable incomes have risen, the added-value products have been able to grow. Now the market is facing a reverse dynamic.

Booker are the big winner

Mr McCarthy says the industry is very slow to recognise the problem and investors are not putting pressure on. The winner, he suggests, is Booker, which is not involved in the heavy investment in opening new floor space that the big four grocers are engaged in.

If Booker is going to do well, then the shops they supply need to do well. Mr McCarthy’s arguments do not necessarily follow through to being good news for local shops. Imagine that supermarkets are two businesses rolled into one: a wholesale arm and a retail arm. It could be that their wholesale arms will do well while the retail arms are suffering the cost of investment in new floor space.

By extension it could be that independent local shops will bear a degree of pain – investing in better standards and expanding their floor space – that their wholesale suppliers will not feel. Even so, independent retailers need their wholesale suppliers to be healthy and competitive so on balance investor confidence in Booker is a good thing. To use a City metaphor, independent shops are a Hold. Your stretch targets should be low single digit year on year sales growth.