Very quietly, several clouds have darkened the sector. An Office of Fair Trading inquiry, looming recession and food price deflation have led to some gentle clippings of profit estimates for the year.
In response the food retail sector, normally a banker in troubled times, has started to wobble. It has fallen 16 per cent against the FT All Share index in three weeks.
The newish management team at Sainsbury's - chief executive Dino Adriano and chairman Sir George Bull - should still report good numbers. Consensus forecasts point to first-half profits of pounds 464m, a healthy 13 per cent increase over the first half of 1997.
Even so, it is what Sainsbury's says about current trading that is important. Throughout the sector sales have been struggling. Analysts expect that like-for-like sales growth may be down from over 6 per cent to about 3 per cent. Tesco recently announced a 2.5 per cent rise. A poor number or warning from Sainsbury's, and all bets are off.
Analysts say that the big four are suffering a reversal of the boom conditions enjoyed for the past three years, during which low inflation, high employment and a feel-good environment encouraged people to "trade up". The market share of the giants climbed to about 50 per cent (see chart).
Now the game has changed. The "feel-bad" factor is kicking in, while food prices which are deflating or at best flat, allied to 8 to 9 per cent cost inflation, largely from rents, rates and wages, are squeezing productivity to the bone.
But that could be only the start if the OFT finds against the big four. It launched its inquiry in July. Its remit is to measure profitability of the major supermarkets and see if the discounts they get from suppliers because of their huge buying power are being passed on.
True, the industry has been here before - it was cleared in a similar inquiry in the 1980s. This time, however, having initially been relaxed about it, industry nerves are twitching. Critics point to operating margins of between 5.4 and 6.5 per cent, up to three times those on the Continent.
So what, says the industry - UK companies invest more in their stores to make them more attractive to the customer. The level of service is better, as are the quality and choice of products. Lower returns on capital - a better measure of profitability, says the industry - than on the Continent and in the US reflect this.
Clive Vaughan of retail consultancy Verdict supports this line and believes that the giant food retailers have little to fear.
"Price is only part of the retail equation. Customers value choice, quality, convenience and desirable shopping environments over price. If you think superstores are expensive, go to a small shop and find out what prices are in villages. Why pick on superstores, which are the most efficient sector in the UK and are doing a much better job than small grocers anyway?"
This may be so, but some analysts reckon that the share prices of Tesco, Sainsbury, Asda and Safeway still don't reflect the possibility of a referral to the Monopolies Commission, an option open to the OFT, whose preliminary report is due in December.
Distortions make margin comparisons between UK and European companies tricky. Land costs, for example, are higher in the UK and will go even higher now with restricted planning permission for new out-of -town stores. Average net margins have also fallen from a peak of 7.4 per cent in 1993 to 6.1 per cent in 1998: the lowest this decade, according to Merrill Lynch.
Even so, one leading analyst suggests there could still be grounds for a referral. "The UK has a cost-additive food structure. Capital and revenue costs (advertising, promotion) are very heavy. Should the industry pay so much to encourage customers into its stores?"
Falling margins, weak sales and a looming competition review, on the face of it, suggest few reasons for the sector to regain its lost ground. But there are grounds for optimism. If the stock market slides, the sector's perceived defensive appeal will again come to the fore. And, according to one industry source, the deteriorating outlook may hasten a much needed consolidation of Europe's food sellers.
Rumours about tie-ups between Sainsbury's and Royal Dutch Ahold, and even possibly a bid for Asda from US giant Wal-Mart, are already flying. Even those who dismiss these as idle speculation see the need for a coming together of a number of the big European food stores in the next few years.
The US has already seen a raft of mergers between big store chains. It's even starting to happen in Europe. Wal-Mart recently bought German hypermarket operator Wertkauf. It has also started a new neighbourhood store format in Arkansas that, if successful, could be a format for a roll-out into Europe.
In theory, that could mean more competition for the UK giants, although one industry expert doesn't see what the attraction would be. "It's unlikely that foreign management could run the stores any better than they are doing at present, and given that the UK is a very competitive market, why would they want to?"
So in the short term it is down to Sainsbury's to provide the reassurance. Given that current estimates of pounds 810m profit for the full year only take it back to the 1995 level, it's time for keeping fingers crossed.Reuse content