Tuesday’s latest release of Kantar Worldpanel market share data for UK supermarkets showed Britain’s biggest supermarket, Tesco, increased sales by their fastest rate in over three years. Growing their share of the market by 2.2%, up from October’s figure of 1.3% (itself the first time that the supermarket has managed positive sales growth since 2015), the data is the latest victory for Tesco CEO Dave Lewis in his ongoing battle to revitalise the supermarket.

Discount upstarts Aldi and Lidl, despite the former continuing impressive double digit growth of 10.2%, are now growing at their slowest rate since 2011, while the other big four supermarkets, Sainsbury’s, Asda and Morrisons, all showing a decline in market share – albeit Morrisons‘ 2.4% fall in market share coming as a result of store closures.

Does this reflect a changing of fortunes for the supermarket stalwarts that have faced increasing pressure from their cheaper European counterparts or is this only a brief respite from the continued rise of the German discounters?

Figures from Kantar suggest that the first scenario is the more likely (at least in the short term), with food prices still 0.5% cheaper than they were this time a year ago.  Despite mounting concerns that Sterling’s post–Brexit devaluation will create increasing inflationary pressures on supply lines for supermarkets, most notably brought to public attention through Tesco’s widely publicised spat with Unilever in October, UK inflation data released today surprised to the downside. A softer than expected 0.9% reading of the Consumer Price Index (expected at 1.1%) will likely be met with a sigh of relief from the big four, hoping that the Bank of England’s forecast for a 2.7% increase over the next two years is an overshoot (perhaps something that may soon become the norm for the central bank given its Brexit forecasts) and that no price hikes will be forced upon them.

Furthermore, in the run up to Christmas, the traditional UK supermarkets should be able to offer their traditional discounts on retail goods and potentially manage to build upon this month’s growth figures, although Kantar analysts maintain that these low prices would only be an ‘artificial’ fix to hold market share.

However, should the BoE inflation targets ring true, inflationary pressures increase and supermarket margins are put in the firing line, Tesco, Morrisons, Asda and Sainsbury’s may have to give in to price mark ups, leaving the door open for the discounters to continue their impressive rise.

The case remains strong for Tesco and the other big four supermarkets to be able to hold off their German challengers, at least in the short/medium term with inflation remaining stable, however, should the Pound continue to languish against its currency peers and supply lines be put under pressure, consumers could soon be looking towards cheaper alternatives.

Henry Croft, Research Analyst, 15 November