Horsegate: premium retailers could benefit: City

Analysts Clive Black and Darren Shirley said: “It could be the case that the more premium retailers may have seen a little more footfall arising from consumers’ reaction to the scandal. So, Marks & Spencer, Sainsbury and Waitrose could have seen a step up in fresh meat market share.”​

While Tesco acted “promptly, decisively and rigorously” ​to news of the contamination, Britain’s biggest retailer could prove to be the hardest hit by the continuing scandal. “Rightly or wrongly, of the big four major UK players, we would harbour some concern that the market leader​ [Tesco] may have seen a little bit of a more negative impact on demand than its peers; all of which have removed product on a precautionary basis.”​

But whether horsegate will cause lasting damage to Tesco’s UK reputation and trading patterns remains to be seen, added Black and Shirley. “We simply cannot make assertions either way at present because the testing situation remains fluid and we need to see greater evidence on trading patterns. Our central expectation though is that the group’s UK trading performance is not likely to be structurally adjusted by this issue, which is an industry wide matter,”​ they said.

Morrisons​

Black and Shirley said Morrisons was trying to take an opportunistic benefit from the scandal by highlighting its vertically integrated supply chain.

“Morrisons’ rationale reflects the opportunity to assert the virtues from its distinctive vertical integration to a shocked and cynical British customer base. However, the group’s initiatives in recent weeks, including a four-page wrap around for the Metro newspaper, also reflects a desperate need to improve trade, given the supermarket’s sales have fallen in recent times despite new stores and considerable industry inflation,”​ they said.

Shore Capital noted Morrisons does not produce all its prepared food, as opposed to fresh meat (excluding poultry). Prepared product is sourced from the conventional supply chain. Consequently there are limits to what the retailer could claim to be within its control.

Also it was too early to tell whether the contamination scandal would change meat consumption levels or trading patterns.

‘Genie is out of the bottle’​

The analysts said the “wholesale abuse of commercial and consumer trust”​ had spawned a whole new industry in DNA testing.  “Now that the ‘genie is out of the bottle’, so to speak, DNA testing can be expected to be a regular feature of the food industry and future product specifications,”​ said Black and Shirley.

Another outcome of the crisis was likely to be intense scrutiny of supply chains. Shore Capital highlighted the “mind-boggling complexity” ​of some supply chains.

“Given the nature of the Findus frozen lasagne contamination ​− which seemed to involve horse meat being carted the whole way around Europe (with a plethora of agents taking margin in-between we should add) ​− there may be a fundamental re-examination of supply chains by retailers and brand owners too,”​ said Black and Shirley.

“The complexity of the Findus chain in particular was mind-boggling to many in its nature and extent. As such there may be a benefit to the food supply chain in the UK if the consumer and retail trade see merit in something more simple, straightforward, authentic and traceable.”​

Meanwhile, environment secretary Owen Paterson has pledged to “insist on concrete, co-ordinated action right across Europe”, ​when he meets agriculture ministers in Brussels later today (February 25) to discuss the crisis.

Horsegate potential winner and losers​

Winners​

• Premium retailers, including: Marks & Spencer, Sainsbury and Waitrose
• UK food supply chain, if scrutiny leads to simplication
• DNA testing services – but cost implications

Losers​

• Value brands and retailers
• Commercial and consumer trust

Too early to tell​

• Tesco
• Morrisons

Source:  Shore Capital.