The big FTSE-listed UK supermarkets are all reporting this week, which meanswe shouldfind outhow they fared during the vital Christmas period. Even a bumper festive periodwont changethe fact that 2017 lookssetto be atricky year for the sector.
Food fight
The big grocershave inflicted a decade of misery on shareholders. Exactly 10 years ago, sector giant Tesco (LSE: TSCO) traded at 500p, today you can pick up its stock for 199p, a drop of an astonishing 60% over a decade. Over the same period, JSainsbury (LSE: SBRY) plunged38% from412p to 252p, while Morrisons (LSE: MRW) fell 16% from 279p to todays 234p. Fresh and tasty they are not.
Managementhubris is partly to blame, especially at corporate jet loving Tesco, whose plans for global domination ended in a fightfor survival athome. The slow economic recovery from the financial crisis has madeshoppers fixate on price and opened the gates to German price warriorsAldi and Lidl, who have both passed the dinner party test, where people are no longer ashamed to say they shop there (ratherit has become a badge of honour).
Healthy living
Brexit was another blow. Weakersterlinghas done little to help UK-focused grocers, but instead haspushed up input costs from imported food and clothing. However, the resilience of UKplc the fastest growing major economy in 2016 continues to inspire.
New figures out today from Visa show thatconsumer spending hit a two-year high in December, with food spending up 2.9% year-on-year. Recent analyst reports also paint a relatively positive picture.Jefferies reckonsthe supermarkets enjoyeda healthy close to 2016 but warned the outlook for 2017 is murkier, with challenged UK consumers continuing to embrace the discounters.
Narrow margins
JPMorgan Cazenove warnedthat valuations are expensive and expectations high, and saidthe news flow is turning negative. Personally,I have been impressed by the way Tesco and Morrisonshave fought back over the last couple of years. It has come at a cost, however, with one price war after another inflicting constant damage on margins.
British consumers remain prettypositive although the latest fall in thepound could aggravate inflationary pressures. Supermarkets face a tough choice: retain business by absorbing higher costs while further squeezing margins, or pass price hikeson to customers and risk losing more groundto the German firms.
Food, glorious food
Investors whoswept the supermarkets out of theirportfolios missed out on a bumper 2016, with Tesco rallying 40% and Morrisons up 57%. However, the falling pound, rising prices, stagnating wages and Article 50 uncertainty will make it hard to repeat the trick.
Tescos forward valuation of 20.3 times earnings doeslittle to lift my spirits, especially given the lack of a dividend.I admire Morrisons feisty comeback but not enough to buy it at 20 times earnings.Sainsburys, whichtradeson a a forecast 12.3 times earnings and yields 4.8%, would be my pick of the three, but making up recent lost ground wont be easy given current uncertainties.
The doom-mongers said Brexit would be a disaster for the UK, until the FTSE 100 surprised everybody by rebounding to new highs.
However, this is still a phoney war and the turbulence may return with a vengeance asPrime Minister Theresa May once again stirs speculation that Britainwill get a hard Brexit.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.