Supermarket groups face the “worst industry conditions for over 30 years”, as capacity outstrips demand.

Broker Investec initiated coverage of food retail today with a bearish note entitled An Inconvenient Truth: An industry in Structural Change, warning that the traditionally defensive sector faces unprecedented competition and cannibalisation which threaten to eat into profits.

Investec analyst Dave McCarthy said that despite retailers including Tesco, Morrisons and Sainsbury’s slowing new space growth, the outlook for food retail “has never been so bleak”. He warned that capacity is outstripping demand as the big four grocers invest in expanding online operations.

McCarthy said: “Historically, food retailing may have been defensive, but we believe fundamental changes to industry structure, cost structures and consumer behaviour have removed this attribute.

“Consumers have curtailed expenditure just as record openings have come on-stream and changes in consumer behaviour are pushing the retailers to cannibalise the industry and to serve consumers in less profitable ways – the internet and smaller stores.”

He said that Tesco, Morrisons and Sainsbury’s all give cause for concern. “Tesco has lost its emotional connection with UK consumers and faces problems in several markets,” said McCarthy. “Sainsbury’s has had some short-term momentum, but profit growth and returns are very questionable. Morrisons has the best self-help programme, but appears to have lost momentum, at least temporarily.”