The last few years have seen a seismic shift in the supermarket sector. No-frills operators such as Aldi and Lidl have grabbed a significant amount of market share from the incumbent supermarkets, resulting in increased competition and decreased profitability for the likes of J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US).
As a result, J Sainsbury has seen its share price fall to its lowest level this century, with it hitting a low of 224p just a few weeks ago. Since then, however, sentiment has improved significantly and has meant that the companys share price has increased by over 20% in the last three weeks.
However, this could just be the start of J Sainsburys fight back, and it could beat Aldi and Lidl in 2015. Heres how.
Readers may or may not be familiar with the Netto brand, which is a Danish supermarket that had a presence in the UK until it was bought out by Asda in 2010. J Sainsbury has entered into a joint venture with Netto and plans to open around fifteen stores, mainly in the north of England, as it aims to appeal to a different price point of customer.
Indeed, the Netto brand will aim to win over shoppers who have deserted the major supermarkets in favour of Aldi and Lidl, and will offer a no-frills shopping experience. Just as Aldi and Lidl offer mostly their own brands, Netto will do the same but will also sell branded favourites too. The focus will be on efficiency, so staff numbers will be kept to a minimum and all available space will be used to stock as many items as possible.
The first Netto store is set to open in Leeds and, as mentioned, subsequent stores will be opened in the north of England. This makes sense for J Sainsbury, since its store footprint is mainly in the south of England, so it is unlikely to tread on its own toes. Furthermore, the Netto brand allows J Sainsbury to go head-to-head with the likes of Aldi and Lidl without destroying the value of its brand. J Sainsbury is currently viewed as a mid to upper price point operator, and Netto allows it to maintain such a position moving forward.
Clearly, there is no guarantee that the Netto brand will be successful. However, it has the same ingredients as Aldi and Lidl, so it should at least be able to hold its own in the no-frills, discount space. This could mean that things do not get much worse for J Sainsbury in the near term, with regard to losing market share and seeing a decline in its profitability. Furthermore, even a stabilisation of its performance could lead to considerable share price gains.
With shares in J Sainsbury trading on a price to earnings (P/E) ratio of just 10.8, they are still very cheap. In addition, a yield of 4.7% remains highly lucrative and is well covered by earnings at 1.9 times. Therefore, with a large margin of safety included in the current share price and the potential for better sales figures moving forward (aided considerably by the Netto joint venture), J Sainsbury could have a prosperous 2015 and beat the likes of Aldi and Lidl.
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Peter Stephens owns shares of Sainsbury (J). 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.