Food spending falls for first time as stores compete and real wages drop

Spending in food stores fell for the first time on record in July amid intense competition between Britain’s biggest supermarkets – while consumers have yet to feel the benefit of recovery in their pockets.

Britons spent £11.7bn on food during the month, a 1.3% drop compared with July last year. It was the first annual fall in the value of food sales since the Office for National Statistics started collecting the data in 1989. The volume of food sales was also down last month, by 1.5% on an annualised basis.

The ONS put the fall in the value of food sales down to “prolonged discounting and price wars”. Britain’s leading supermarkets have all slashed prices on basic items to fight off competition from Aldi and Lidl, the German discount food chains that have become increasingly popular among cash-strapped UK shoppers.

At the same time, a prolonged fall in real wages has encouraged consumers to shop around more for bargains, opting for cheaper alternative products such as own-brand labels, and buying fewer premium-brand goods. Consumers are also focusing on wasting less food, buying little but more often.

Neil Saunders, managing director at retail consultancy Conlumino, said the unprecedented fall in July was significant. “It is an indication of the issues occurring in the food and grocery market at the moment. We have too many players chasing not enough sales.

“[The drop] is significant because it underlines the real pressure within that segment of the market, and it underlines an economic shift in the way the industry works. That’s obviously very painful for some of the players in that market.”

Prices in UK food stores were 0.2% higher than a year ago – the lowest food-price growth rate since December 2004. Prices of goods sold across the retail sector were 0.9% lower than a year ago, the strongest rate of deflation since 2009.

Britain’s economic recovery looks increasingly established, with growth outpacing that of its G7 peers and an increase in gross domestic product of 0.8% in the first and second quarters of this year. Nevertheless, household budgets remain under pressure as workers’ real pay has fallen for the majority of the past six years.

Consumers are also braced for higher borrowing costs, as the Bank of England moves closer to increasing interest rates for the first time since March 2009.

Saunders said prospects for Britain’s retail sector overall remained mixed. “It is a very competitive sector at the moment and, although there is a genuine economic recovery, it is not filtering through to consumers as much as retailers would like. People are still very cautious about spending. It is not a bad picture for retail, but it is mixed.”

He said that a strong housing market was boosting some areas of the sector, including homeware and DIY goods.

The ONS data showed the volume of retail sales rose by 0.1% over the month in July, disappointing City expectations of a stronger rise of 0.4%. Growth was held back by sales of fuel and household goods, which both fell in July.

It slowed the annual rate of growth to an eight-month low of 2.6%, and could be a sign that economic growth is moderating, according to John Hawksworth, chief economist at accountancy firm PwC. However, he said it was too soon to be clear whether it was a sign of things to come. “Retail sales data can be erratic, so we should wait for more evidence before concluding that the recovery is running out of steam.”

Once fuel sales were stripped out, the volume of retail sales grew by 0.5% on a monthly basis in July. Samuel Tombs, senior UK economist at Capital Economics, said it was an encouraging sign of resilience among consumers.

“July’s retail sales figures provided reassurance that consumers are still willing to spend more even though an interest-rate hike is looming.” Tombs said a 3.3% fall in fuel sales in July was probably down to a rise in prices during the month and should prove to be temporary.

“Oil prices have fallen sharply in recent weeks, suggesting that pump prices will fall back soon,” he said.