By Kathy Sandler
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- The U.K.'s slowing rate of food price inflation is good news for consumers here but bad news for the country's supermarkets as the trend means slower sales growth and less money taken at the till.
Wednesday saw that confirmed by the last of the U.K.'s "Big Four" supermarket chains to report current trading - J Sainsbury PLC (SBRY.LN) - which echoed comments from its other three rivals Tesco PLC (TSCO.LN), William Morrison Supermarkets PLC (MRW.LN) and Asda Group Ltd., Wal-Mart Stores Inc.'s (WMT) U.K. supermarket business - all of which have reported or predicted a slowdown in sales growth on the back of stabilizing prices.
Their message was reinforced by news U.K. shop prices fell on the year for the second straight month in September, according to a survey by the British Retail Consortium, with food prices rising 2.5% compared to September last year but falling 0.1% from August.
Food price inflation on the year has fallen from 9.1% in September 2008, to just 2.5% last month, eroding the increase in sales the supermarkets have enjoyed over the last twelve months.
This is neatly illustrated in the slowing growth Tesco and Sainsbury reported in the last two days, with Sainsbury's same-store sales, excluding volatile fuel and the distorting effect of VAT, growing by 5.4% in its fiscal second quarter, from growth in the first quarter of 7.8%.
Tesco, reporting a fiscal second-quarter that ended five weeks before its rival J Sainsbury, said sales on the same basis rose 3.1%, having slowed from 4.3% in the first quarter.
And there are no signs of an acceleration in the near future.
Sainsbury chief executive Justin King said Wednesday he expects market growth to slow in the coming months, while Tesco chief Terry Leahy Tuesday commented that he expects food price inflation to remain low.
Last month, Marc Bolland, CEO of the nation's fourth-biggest supermarket chain William Morrison, cautioned that sales growth in the grocery market will fall to low single digits as prices stabilize, while Asda's second-quarter results in August reflected the same slowing sales growth trend.
This sliding rate of food inflation is not unexpected, but it has forced supermarkets to improve their consumer offerings, including redoubling efforts to attract customers through loyalty store-card promotions, and promoting discounted or own-brands to cash-strapped consumers.
It has also come at a time when food retailers - viewed positively during the recession for their relative resilience - are losing favor with investors keen to ride the stock market upturn on more cyclical stocks.
Seymour Pierce analyst James Grzinic believes the Sainsbury investment case is not particularly inspiring and paints the whole food retail industry with the same lackluster brush.
He describes food retailers as being "left behind in the market rally, trading at widening discount to fair value, offering increasingly appealing yield support but spooked by food deflationary fears."
Food price deflation, which neither Tesco's Leahy nor Sainsbury's King expect will materialize, is a key concern for some food retail analysts who look in horror at the U.S., where grocery stores have slashed earnings expectations as sliding prices undermined their full-year forecasts.
Citi last week initiated a sell rating on all three listed U.K. supermarket chains - Tesco, Sainsbury and William Morrison - while noting that U.S. grocers didn't foresee the earnings impact from lower food price rises.
Still, Tesco CEO Leahy believes that low rates of inflation is preferable. "High inflation is damaging for the industry because it erodes consumer confidence in prices, low or no inflation is better," he said Tuesday.
Sainsbury's Justin King told reporters on a conference call Wednesday that customers are returning to the company's premium prepared food ranges like Taste the Difference, and also the ethical brands like Freedom Foods and organic produce.
Both Tesco and Sainsbury said shoppers are once again buying ready meals, as they find their wallets a little fuller and decide to spend more to save time.
-By Kathy Sandler, Dow Jones Newswires; 44-207-842-9293; kathy.sandler@dowjones.com