The UK economy will set the pace for growth in Europe this year. Given the strength of recent growth numbers and the continued slew of positive macro data, we have revised up our 2014 growth forecast to 2.1% from 1.8% previously. However, we continue to warn that without a robust recovery in wages and business spending, the current rebound is at risk of losing momentum.
Despite revising up our forecasts, we continue to warn that the current growth rebound is built on weak foundations. For the time being the driving force behind the recovery has been an increase in consumer spending, which has been encouraged by rising property prices in London and other localised areas of strong property demand. Given that wages have failed to make much headway in recent quarters, the increase in consumer spending has been paid for out of already low household savings and an increase in unsecured debt. If wages fail to pickup, the current consumer-driven burst in growth could quickly dissipate, unless retail lenders are willing to take on much more risk.
Headline Industry Data
- 2014 total food consumption growth (local currency terms): +3.0%; compound annual growth rate (CAGR) to 2018: +3.6%.
- 2014 per capita food consumption growth (local currency terms): +2.4%; CAGR to 2018: +3.1%.
- 2014 total soft drinks value sales (local currency) growth: +4.8%; CAGR to 2018: +3.9%.
- 2014 alcoholic drinks value sales (local currency) growth: +2.0%; CAGR to 2018: +1.9%.
- 2014 mass grocery retail (MGR) sales (local currency) growth: +2.2%; compound annual growth rate (CAGR) 2014 to 2018: +2.2%.
Key Company Trends
Premier Foods Sells Majority Stake In Hovis: UK food company Premier Foods has had a particularly tough few years. The company owns a number of ubiquitous British food brands, including Bisto Gravy and Mr. Kipling Cakes, but has been on a downward spiral, with operating income declining in three out of the last four years. This is requiring the firm to increase its focus on its more profitable grocery business at the expense of laggards such as bread.
Diageo To Cut Costs Amid Slowdown In China: UK-based beverage company Diageo has announced that it will cut costs by GBP200mn (US$330.35mn) in China by 2017. The company's move comes amid lower demand and declining sales growth in the country as well as other emerging markets. Emerging markets account for around 42% of the company's total global sales. The company has registered a lower than expected overall sales growth of 1.8% in the past six months.
Big Four Will Begin To Make Gains In 2014: Following the release of Christmas trading results for many of the UK's major grocery retailers, we believe that the 'big four' of Tesco, Sainsbury's, Walmart-owned Asda and Morrisons will begin to make ground on the top- and bottom-end retailers in 2014.
Christmas trading results were broadly in line with our key company-specific views, namely that Waitrose and Marks & Spencer would post strong like-for-like sales growth, with Sainsbury's outperforming Tesco, Morrisons and Asda yet losing out to discount retailers Aldi and Lidl.
In our view, the most interesting mass grocery retail story is the battle of the big four mid-range supermarkets. The poor performance of these retailers has predominantly been down to macroeconomic factors, which are likely to dissipate as 2014 progresses. As real wages begin to rise and inflation edges lower in 2014, the big four look well placed to take some market share away from the top- and bottom-end retailers. Our forecasts suggest that between 2014 and 2018, supermarket and hypermarket sales will grow by 13.9% and 14.8% respectively, compared with the industry average of 11.2% growth.