Tougher times lie ahead for retail

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Atrocious rain has hit commodity costs, food prices are going up, and consumers are being hit by higher interest rates. That means food retail growth will be squeezed Believe it or not, being forced to watch Coronation Street five times a week does have its advantages. At half time, it's always possible to gauge the competitive temperature of the food retail industry simply by watching the adverts. In recent weeks, it is clear that times they are a-changing. The focus of advertising has moved from pushing healthy eating to pushing relative price positions. It's because we've got less money in our pockets, and that trend is only getting worse. The pressure on the UK population's disposable income is increasing. Some economists have started suggesting that interest rates won't peak until they get to 7%. On the basis that hikes in rates don't really have an impact for six to nine months, the squeeze that we are feeling on our wallets and purses is going to continue, and worsen, for some time to come. Ironically, the potential for increasing food price inflation is one of the main factors causing interest rate expectations to rise. But how does that tie in with the supermarkets' increasing their focus on price? Obviously the weather has been biblical this year. While the TV news has focused on people using impromptu canoes, the floods and the general lack of sunshine have made this year's crop the worst for many, many years. And that will have a big impact on inflation. According to The Grocer in recent weeks, the supply of ice cream, bread, other wheat products and many more items has been affected either by damage to crops or failing manufacturing capabilities. Even before the floods, food inflation was at a historically high level. We suspect it will get worse in the next few months. The subtle trick that the retailers are playing is talking about relative pricing. Underlying prices are rising, but there will be a lot of lines where the trend is downwards, and in other instances, head to head pricing comparatives are used. The Tesco Price Check mechanism is valid but shoppers may be left with the impression that basket prices are currently falling, when the truth may be somewhat different. So readers should indeed worry. In general, food prices are rising. In general, the amount of money in consumers' pockets is falling. Something will have to give. Food retail sales growth will get squeezed. Investors, retailers and consumers should all brace themselves for a rough ride ahead.n Jonathan Pritchard, Partner, Oriel Securities

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