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Is the UK supermarket sector oversaturated?

The revelation that Asda, the number two supermarket chain in the UK, is looking to expand into smaller format stores and also looking at the potential of increasing its portfolio of non-food shops may well signal that the UK supermarket is oversaturated. The company confirmed that sales growth in the fourth quarter of 2009 was down from 5.6% in the previous quarter to 4.6%, which is the slowest growth rate since the third quarter of 2007.

This comes at a time when growth for Tesco and Asda, the two largest supermarket chains in the UK, is showing signs of slowdown and both companies appear to be looking in different directions for future growth. Whether this is a sector wide phenomenon or just a case of shoppers beginning to look elsewhere, with Morrisons and Sainsburys performing well, is open to debate but we are likely to see new ventures and new services announced by Asda and Tesco in the short to medium term.

The UK retail sector is now dominated by a small number of large players as the smaller operators continue to struggle on price and volume with many falling by the wayside. This is unlikely to change in the short to medium term as the hangover from the UK economic downturn puts more pressure on balance sheets with UK banks either unwilling or unable to forward additional short-term finance.

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