Pressure on the housing market is already taking its toll on consumer confidence, making for a worrying start to the year for retailers

As the new year begins with profits warnings from the general retail sector, I'd like to examine what lies ahead for the consumer and how that will impact on food retailers. It will be worse for the non food guys, but I'm afraid my conclusions don't make great reading: strap yourself in, it's going to be a rocky ride.

Tesco, Asda, Sainsbury's and Waitrose have reported satisfactory Christmas trading. Marks & Spencer dropped the turkey completely but, in general, the festive season seems to have gone OK for food retailers.

However, across the tracks, there was blood on the high street. The retailer formerly known as Dixons had a major profits warning, Marks & Spencer disappointed on general merchandise and small players such as Land of Leather and ScS missed the bus too.

Was Christmas just a blip or will the non food malaise get worse and drift over into food? Definitely the latter.

We think the pressure on the housing market is intensifying, as consumers find the availability and price of mortgage debt offputting. Sentiment regarding this has a massive bearing on consumer confidence and it's only going one way.

We could well be looking at a rerun of the early 1990s consumer recession and it's tough for anyone who owns shops in those conditions. The companies that are going to be worst hit in this scenario are the DIY stores and big-ticket retailers, but the trickle-down effect is already being felt across the board. It will reach food.

So what are the consequences for the food retailers?

Healthy eating is never going away but, for now, trading up (shifting from a value line to standard own label, for example) is history. In fact, trading down is much more likely.

The trend could play straight into the hands of Morrisons, Asda and the discounters.

M&S has a problem, however. We think the pricing architecture is wrong: Simply Food is simply too expensive.

We'd be concerned for Waitrose, but Sainsbury's seems to have reinforced its value credentials of late.

Tesco has a non food business and can't be immune to the wider consumer slowdown, but its food brands are second to none. Tesco may sneeze, but it won't get the flu.

So it could be grim, but just be thankful you're not in non food.n

Jonathan Pritchard

is a partner at

Oriel Securities