Readers who follow my articles on The Motley Fool will be well aware that Ive been rather negative on the prospects of our listed supermarkets. My thesis is simply this: that the landscape across the way we consumers choose to shop for our groceries is undergoing a seismic shift towards the likes of Aldi and Lidl.
Once known as discounters, these smaller format stores purveying their wares at prices that make their larger competitors wince are increasingly being embraced by consumers looking for perfectly good quality food at a good price.
Is The Trend Beginning To Turn?
The latest grocery share figures from Kantar Worldpanel, for the 12 weeks ending 24 May 2015, show continued slow growth in the supermarket sector with sales increasing by a paltry 0.2% compared to the same period a year ago. Of the big four, Morrisons was the only one to see increased sales in the latest period, although its market share remained unchanged at 10.9%. This was down to recent customer-friendly incentives and online sales growth.
Whilst this will be a welcome boost for the new CEO David Potts, there remains plenty of work to do in order to right the ship. I like the fact that there is a potential growth area for the online side of the business, with the bright yellow Ocado vans becoming increasingly more visible in and around my locality. What makes me nervous, however, is the strategic review currently under way, together with prices being slashed. This will put pressure on margins and the business as a whole. With the shares trading at 15 times forward earnings and yielding just over 3%, I think that I can find more attractive investments elsewhere in the market.
Much like Morrisons, Sainsburys also held its market share at 16.5% despite sales falling by 0.3%after an improved start to the year. Like their smaller rival, the group has a new CEO and a strategic review is under way. When the company updated the market on 10June, chief executive Mike Coupe said:
Trading conditions are still being impacted by strong levels of food deflation and a highly competitive pricing backdrop. These pressures, including the effect of our own targeted price investment, have led to a fall in like-for-like sales for the quarter.
Although both management and investors were encouraged by some of the early trends witnessed in key trading and operational metrics, I think that there is some way to go before a better period turns into positive momentum. As such, with the shares on offer around 13 times forecast earnings and yielding just under 4%, Ill be watching from the sidelines for now.
Tesco sales decreased by 1.3%, with its market share falling by 0.4 percentage points to 28.6%. Not even a strong performance from the Tesco Express convenience stores and its online channel was enough to compensate for falling sales in the larger outlets.
Personally, as Ive asserted before, I think that Tesco has its work cut out as it fights on a number of fronts. A colleague of mine periodically reminds me that the main reason for Nazi Germany losing the Second World War was due to the fact that it was fighting on too many fronts.
Whilst I believe that there is hidden value within Tesco, such as the Clubcard business, this needs to be realised in order to fix its balance sheet. No matter how hard I try, I still cant get excited about these shares. All I have seen for some time now is broker downgrades and the lack of a dividend to placate me whilst I wait for the business to come good. Im sorry to say, but the shares are still not for me.
The Best Of The Rest
Elsewhere, Asda sales were down by 2.4% with lower prices charged at the till not sufficiently offset by increased footfall.
Lidl grew sales by 8.8% for a new record high market share of 3.9%.
Aldi also grew sales by 15.7%, taking share to 5.4% of the market.
With growth of 1.6%, Waitrose has increased its market share to 5.2%, helped by a regional bias towards southern Britain.
A Race To The Bottom?
As we can see from the three-year chart below, investors would be nursing a sizable loss had they invested in our listed supermarkets.
What is clear to me when I look across the sector, I see a fiercely competitive landscape with all the players trying to catch up with the disruptive upstarts Aldi and Lidl. I think that there are plenty of tough times to come as each player competes for our business. As Warren Buffett said:Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
With that in mind, Im happy to sit and watch from the sidelines I dont think any of these shares will make you rich in this climate
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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.