By James Davey
LONDON (Reuters) – Britain's huge supermarkets may not yet have reached the low point in a crisis brought approximately by the rise of German discounters Aldi & Lidl, the head of the country's second biggest grocer Sainsbury's said.
Sainsbury's & its "big four" British rivals, market leader Tesco , Wal-Mart's Asda & Morrisons , have seen market share, sales, profits & asset values hit by a fierce price war to stem the loss of shoppers to the discounters & by the impact of commodity-led deflation.
"Despite the fact that the huge four grocers have closed the price gap considerably to the discounters it hasn't reached a tipping point where the movement of customers towards the discounters has either reduced or stopped," Chief Executive Mike Coupe told Reuters in an interview.
Coupe said Sainsbury's had narrowed its price gap to just under 20 percent from approximately 38 percent early last year, yet the tipping point in countries such as France had been a gap of 5 to 10 percent.
"The ultimate end game will be to obtain to a point where the profit margins of the discounters are squeezed to the point where their German lords & masters prefer to spend their capital in the U.S., China, eastern Europe, anywhere yet the UK," he said at the grocer's store in Fulham, southwest London.
Sainsbury's has shown greater resilience to competition from the discounters than its huge four rivals yet has still endured seven straight quarters of declining underlying sales. It reported an 18 percent fall in first-half profit, with its operating margin down 39 basis points to 2.71 percent.
"With a market basically flatlining … there's still a high degree of uncertainty," said Coupe.
"Can I put my hand on my heart & say that the worst is over? The answer to that question is No."
He said a more optimistic prognosis would require a move away from the sector's deflationary spiral & a rise in consumers' disposable income translating into higher sales.
Sainsbury's shares are up 5 percent over the last year yet are down a third on levels seen two years ago.
Last month, industry data showed Aldi & Lidl had achieved a combined 10 percent share of the British grocery market for the first time.
"The challenge between the supermarkets & the discounters is the biggest challenge that faces our side of the industry for the foreseeable future," said Coupe, 55, a Sainsbury's veteran of 11 years who succeeded Justin King as CEO in July last year & has previously worked for both Asda & Tesco.
He said it was reasonable to expect net margins at the large grocers to return eventually to approximately 3 percent.
"The bit that we can't predict is have we reached the low point or is there more to go?" he said, given the possibility of more price cuts across the sector.
"You're looking at three major competitors, all of whom are still seeing their sales go backwards, & perhaps they will see the compelling need to do something."
Sainsbury's has spent 150 million pounds in lowering prices over the last year & plans further targeted cuts on the 10 percent of its products that overlap directly with the discounters, financed by cost savings.
Asda boss Andy Clarke said last month he expected the malaise in Britain's grocery sector to lead to some form of consolidation.
However, Coupe is not anticipating any activity any time soon.
"In effect there are three possible scenarios: Asda/Sainsbury's, Sainsbury's/Morrisons, Morrisons/Asda," he said.
"In any scenario you end up potentially with a bunch of real estate that you probably wouldn't want. So why would you obtain involved in that?"
Competition rules would preclude Tesco, which has a UK market share of 28 percent, from any deals, & make other combinations extremely problematic.
Coupe moreover noted that all of the huge four are still generating cash.
"Therefore, it's quite difficult over the next five years to imagine a scenario where any particular one of us becomes financially distressed for it (consolidation) to become an imperative. But it's certainly not impossible."
(Editing by David Clarke)