UK chains suffer as consumers head to discounters and online

A day after Irish figures suggested a slight improvement in Irish retail sales at the end of the year, the dire state of the UK "high street" was laid bare yesterday as Tesco, Marks & Spencer and Morrisons all unveiled weak trading over the crucial Christmas period.

In a surprise statement to the stock exchange, supermarket chain Morrisons warned its underlying annual profit would be at the bottom end of City forecasts. The company blamed consumers’ lack of spare cash and its weak presence online and in convenience stores for a 5.6 per cent fall in sales at established branches in the six weeks to January 5th.

The chief executive, Wicklow-born Dalton Philips, said: "In a very tough market our sales performance over Christmas was disappointing." Citing a trend that will be familiar to Irish shoppers, he said those who would traditionally stock up for Christmas at Morrisons had instead turned to discounters Aldi and Lidl.

Tesco, the biggest supermarket chain in both Britain and Ireland, also announced worse-than-expected Christmas sales. In the six weeks to January 5th revenues at stores open a year, excluding petrol sales, fell 2.8 per cent, with UK like-for-like sales down 2.4 per cent.

Tesco's chief executive, Philip Clarke, said: "Clearly Christmas was disappointing."

Tesco said it expected full-year profit “within the range of current market expectations” but admitted those expectations had been reduced by between £50 million and £150 million from the time of its last update in December.

Clarke said that while online and convenience store revenue had risen, the group’s large out-of-town stores had suffered falling sales. He said: “It’s tough because the market is tough and consumers are still feeling they don’t have as much to spend.”

Some senior investors have been concerned that Tesco will be forced to cut prices aggressively to counter Aldi and Lidl. This could lead to a further reduction in the operating margin from the current 5.2 per cent – already lowered in a profit warning two years ago from its historic level of 6 per cent.

Adding to the grim day for big retailers, Marks & Spencer said non-food sales in the three months to December 28th fell below its own expectations. Group like-for-like sales in the eight weeks before Christmas were up 1 per cent but over the past three months they were down.

Marc Bolland, M&S chief executive, pointed to unusually warm weather in October for the sales fall and said improved business over Christmas, helped by big discounts, could not make up the lost ground. Turning round M&S's ailing clothing business is Bolland's biggest headache.

All three bosses are under pressure to revive their businesses while dealing with fierce competition and reduced household spending power. Morrisons is trying to catch up with its rivals in the growth areas of online sales and convenience stores while Tesco is ploughing money into its long-neglected stores. Both are losing out to Aldi and Lidl, which have claimed record Christmas trading.

M&S's food business performed solidly but Bolland needs to revamp the group's clothing range, which is losing out to Next, arch-rival John Lewis and high-fashion chains such as Zara. The clothing division has passed through ten consecutive quarterly sales declines.

Bolland blamed other retailers for starting a price war in December that he said forced M&S to offer discounts of up to 30 per cent on general merchandise. Debenhams discounted aggressively in the run-up to Christmas and unveiled a profit warning last week.

“Holding our nerve was something we were doing but the market didn’t. We were not the first in; we were one of the last.”

M&S said its discounting would reduce the profit margin in general merchandise.

Back at Morrisons, which operated stores in the North before selling to Asda, Philips had said in November that he expected positive trading over Christmas, after more than a year of underlying sales declines. He misjudged, however.

“Where you would have customers who may shop 11 months of the year in a discounter as their primary shop, but at Christmas they trade up ... this Christmas those customers who said ‘I’m going to trade up’, didn’t,” the former Brown Thomas boss said yesterday.

He also said Morrisons had been hurt by not having an online operation or a significant convenience store business, and by rivals’ aggressive use of vouchers.

However, he denied that trading had suffered in Morrisons’ core stores while it concentrated on taking its stores more upmarket, as well as building its online and convenience store businesses.

“We are all in this challenge together. It’s not about us taking our eye off the ball,” Mr Philips said. “Our store execution was good ... I’m pushing back on that quite hard.”

He added that he had no plans to step down despite the deteriorating performance since he became chief executive in 2010. “[We have] big strong structural challenges and we are facing into them quite aggressively. My job is to execute the programme.”

Bolland at M&S was also bullish about his future.

“It’s all about the business for me, and, and I think the business is taking the right steps,” he said.

Whoever may be steering the ship, the big retailers face multiple problems – shoppers are buying more online and are cutting back on big weekend trips to the supermarket. With incomes squeezed by rising prices and stagnant wages they are spending less and taking their custom to discount chains.

Andre Spicer, a professor at Cass Business School, said: “The big companies have been resting on their laurels. This means while they are trying to change things around the fringe, they may have overlooked the reason that customers go to them in the first place – for good value in the case of Tesco or for quality in the case of M&S.”

While John Lewis uses its stores to let shoppers browse, have a coffee and order online, “going into the average Tesco is a depressing experience most people avoid if they can”, he added.

-(Guardian service/Copyright The Financial Times Limited, 2014)


Winners and losers: How retailers fared
Tesco
Verdict: Loser
Sales: In the six weeks to January 5th, revenues at stores open a year excluding petrol sales fell 2.8 per cent with UK like-for-like sales down 2.3 per cent. CEO Philip Clarke said that while sales online and in convenience stores had risen, the group's large out-of-town stores had seen sales fall.

Marks & Spencer
Verdict: Loser
Sales: M&S said non-food sales in the three months to December 28th were below its own expectations. Chief executive Marc Bolland said improved performance over Christmas could not make up for falling sales of clothes and other general merchandise.

Sainsbury's
Verdict: Winner
Sales: Revenue excluding new stores and fuel sales edged ahead 0.2 per cent in the three months to January 4th. Chief executive Justin King said the week leading up to Christmas was Sainsbury's busiest ever with more than 28 million transactions.

Mothercare
Verdict: Loser
Sales: UK sales in stores open a year or more fell 4 per cent in the 12 weeks to January 4th and total UK sales fell 9.9 per cent. Mothercare warned that poor pre-Christmas trading would cause it to miss annual profit forecasts. House broker Numis more than halved its estimate for annual pre-tax profit to £8m from an earlier forecast of £17m.

Next
Verdict: Winner
Sales: Up 12 per cent on last year for the period from November 1st to December 24th. Clothing retailer reported sales "significantly ahead of expectations" in the run-up to Christmas. The company raised its pre-tax profit forecast for 2013 to £684m-£700m and announced a special dividend of 50p per share.

John Lewis
Verdict: Winner
Sales: A 7 per cent rise in like-for-like sales in the five weeks to December 28th. John Lewis was boosted by a 22.6 per cent rise in online sales compared with the same period in 2012, accounting for almost a third of its total sales over the period. But sales in stores were also up, by 1.2 per cent, as shoppers snapped up last-minute presents on the high street.

Debenhams
Verdict: Loser
Sales: Underlying sales rose by 0.1 per cent in the 17 weeks to December 28th, despite a 27 per cent rise in sales online. Gross profit margins fell by up to 1 per cent. Debenhams warned pre-tax first-half profits would be 26 per cent down on last year at £85m after hopes were dashed for a late surge in sales in the week before December 28th.

House of Fraser
Verdict: Winner
Sales: Like-for-like sales excluding VAT for the three weeks to December 28th were up 7.3 per cent, with online sales up 57.7 per cent. Department stores group House of Fraser said a surge in online sales helped it to its best ever Christmas trading period.