Morrisons signals strong supermarket season with worries

Morrisons set a high bar for supermarkets’ Christmas reporting season on Tuesday, though looming inflation and revived growth at Aldi and Lidl shows grocers aren’t out of the woods yet.

Morrisons’ figures reaffirmed its transformation last year from an ‘also ran’ into a serious threat to rivals like Sainsbury’s, whilst the latest set of grocery industry data, also out on Tuesday, showed Tesco made even bigger strides.

Having faced the most arduous challenges (many self-inflicted) during two years of reckoning, Britain’s No.1 supermarket recorded the fastest-growing sales in the Christmas quarter, as deflation faded, said researcher Kantar Worldpanel. Tesco sales grew 1.3% over a 12-week stretch ending on 1st January, besting arch rival Sainsbury’s, where sales fell 0.1%, and Asda, which saw a 2.4% fall.

The market clearly rewarded Tesco’s news more on Tuesday–its stock rose as much as 6.5% against a 5% rise by Morrisons, even though investors will have to wait till Thursday for an official take on Tesco’s Christmas trading.

Tesco’s Northern England-based rival was no laggard however.

Kantar read Morrisons’ sales as rising 1.2%, but the group’s own figures from stores open more than a year over 9 weeks ending on 1st January were up  2.9%. Same-store (or like-for-like) sales exclude fuel, but the gross measure rose more than the result in Kantar’s survey too, up 2%.

Whilst a broader strengthening is afoot among all big British grocers after years of painful efficiency drives and soul searching (and a little help from fading deflation) rivals will struggle to match Morrisons’ milestones, including its best underlying sales growth for seven years and unquestionably firm transaction volume.

Less positively, the group has still not achieved a compelling rate of Internet growth (only a 0.6% like-for-like contribution at Christmas).

Fresh worries, stale threats

More seriously for the Big 3, share price applause from Christmas cheer will also be damped by investor caution, given the uncertain impact of rising inflation on consumer spending and margins. Forecasts that UK inflation will hit 3% this year are now common.

Another potential worry is that supermarkets’ bêtes noires—discount chains Aldi and Lidl also redeemed themselves over Christmas after 2016 saw their slowest sales growth for years. Aldi sales surged 15% compared to 2015, whilst Kantar’s survey revealed growth of 11.8% and 7.5% respectively.

Still, Tesco and Morrisons have come a long way since being challenged significantly by the German upstarts for the first time around three years ago, and their share price gains over the last year–60% and 40% respectively—indicate that investors now see them as capable of withstanding a tougher environment.

Investors are likely to judge trading updates by the rest of Britain’s large grocers by similar standards. Expect shares of the weakest performers to slide.

Sainsbury’s updates trading on Wednesday 11th, Tesco and Marks & Spencer on Thursday 12th, Ocado on Tuesday 31st January.