U.K. PROFIT MARGINS SEEN IN STEADY DECLINE

JAMES FALLON

LONDON (FNS) -- Profit margins at U.K. food retailers are in a steady decline that will continue over the medium term as a result of intense competition and rising costs, according to a report by Verdict Research, a consultancy based here.

But the report, "Verdict on Grocers and Supermarkets," said the decline represents a return to normality in the industry, which generally suffers from "intense competition in an overshopped market."

It said the 1980s boom among British food retailers -- when they gained market share whenever they opened a superstore -- was the exception rather than the rule. "Apart from such brief periods, there has always been saturation in grocery retailing," Verdict said.

To cope with the greater competition, food retailers will expand more aggressively into nonfood areas, where they already generate sales of more than $30.8 billion (20 billion pounds) a year. The main areas currently are books, videos and records, confectionery and stationery, but Verdict said one of the biggest opportunities is in apparel. ASDA Group, the United Kingdom's fourth-largest retailer, already has registered significant success with its George line and Verdict expects other companies to follow its lead.

ASDA generally has taken the lead in nonfood categories, becoming the first major U.K. retailer to offer discounted books and trying unsuccessfully last year to break the U.K. price restrictions on over-the-counter medicines.

In foods, Verdict said the offerings among the leading four chains are relatively similar in terms of quality and variety. The main difference now is price and "the need to get price messages across to consumers is intensifying." This has resulted in the launch of price-led advertisements in the United Kingdom as well as the loyalty card schemes introduced by Tesco and Safeway.

Tesco's loyalty card has helped it leapfrog J. Sainsbury to become the United Kingdom's largest food retailer with a 14.4% share. This compares with Sainsbury's 12.9%; the 7.6% of Argyll, owner of Safeway, and the 7.4% of ASDA. While Verdict said Sainsbury's has displayed weakness in allowing its competitors to set the agenda for the market, "much of the talk of Sainsbury's demise is alarmist and points to the company's continued superiority in performance by most measures," including the industry's highest sales per square foot.