UK Supermarkets See Double-Digit Growth Amid Inflation

Major supermarket chains in the UK have seen substantial increases in sales over the past month due to falling inflation, but British shoppers remain cautious as uncertainties persist.

Not All Stores Benefiting Equally

The inflation rate for groceries in the UK is growing at a slower pace than overall inflation, returning to a downward trend over the past 18 months that was briefly interrupted in July. Grocery inflation shows an annual rate of 1.7%, which is good news for UK retailers as total sales in the sector rose 3% in the past year. However, not all stores have seen equal increases. Asda has lagged in sales growth and lost significant market share, while M&S remains the leader in both sales growth and share price increase, significantly helped by the non-grocery section.

Despite this, 60% of British consumers remain worried about rising costs, which is why the biggest gainers in the market are Lidl and Ocado, which offer more affordable alternatives. Aldi has also increased sales but apparently wants more as it plans a record £800 million expansion to better compete with budget rivals. Meanwhile, continuing a trend during the cost of living crisis, Marks & Spencer's share price has grown by double digits over the past month. Analysts point to the company targeting higher income customers less affected by inflation, as well as securing growth in the higher margin non-grocery sector. In fact, this has been so successful for M&S that it is launching clothing-only stores to expand its reach to a younger demographic.​

Anchoring Expectations

The cost of essential items such as groceries is more visible to the public and provides early signs of future inflation trends. Higher living expenses can increase pressure on wages, an issue the BOE noted could necessitate raising interest rates. Consumer expectations for inflation in the UK fell to their lowest since 2021 in the September survey, with the average forecast being approximately 2.7% for this year. As the Bank aims to guide price change expectations with policy, this lower outlook may reassure that restrictive measures have been effective and inflation is less likely to accelerate during the easing cycle.

While lower grocery price growth could benefit British consumers, it risks weakening the pound relative to other currencies. Although this week's Bank meeting is not anticipated to see policy changes, continuing easing inflation may quicken the pace of interest rate cuts. At present, economists mostly expect one more rate cut in 2024, compared to two predicted by markets. How inflation develops, including supermarket costs, will be key to determining who is correct - and whether the pound depreciates against other major currencies.​

Ocado Near Reversal Point?

Ocado's share price appears to be declining in a wedge formation but may soon reverse. While it has risen from 275 pence, further upside potential remains limited as long as it trades below 450 pence or the overall wedge trendline. A move above the regional swing could allow the share price to advance towards 700 pence over the longer term unless the stock retreats back to around 250 pence and potentially as low as 200 pence support.​

Source: SpreadEx OCADO GROUP

Key Takeaways

Major supermarket chains in the UK have seen substantial increases in sales over the past month due to falling inflation. However, 60% of British consumers remain worried about rising costs. While some stores like M&S and Lidl have seen significant growth, others, such as Asda, have struggled. Lower grocery price inflation relieves shoppers but risks weakening the pound if it causes interest rates to fall faster than anticipated. The cost-of-living crisis continues to shape consumer behaviour and business performance in the supermarket sector.​