What is shopping to you? Is it fun? Or a chore?
I actually enjoy shopping. Its an excuse to take my son out of the house, and its fun to browse the aisles to find a tasty ready meal or that perfect bottle of wine.
Sainsburys, moving both upmarket and downmarket
I think shoppers are divided between those who find their visit to the local supermarket a chore where they try to save as much money as they can, and those whose main concern is whether they should buy the beef with udon noodles or the Thai red curry.
I often talk about this being a low-cost, China-centric world. This means there are lots of cheap and cheerful products, allowing you to spend the very minimum and still have a reasonable standard of living.
However, it also means that high-quality, value-added (even luxury) products are cheaper and more plentiful than theyve ever been. With the massive production capacity of China, it can cater amply for both markets.
The thing about shopping atSainsburys (LSE: SBRY)is that its increasingly becoming like shopping at Marks & Spencer and Waitrose. Its an enjoyable experience where you think about more than the bottom line on your till receipt. The supermarket is full of what you might term affordable luxuries.
Seen in this light, I can understand the point of the companys bid for the Argos arm of Home Retail Group. At first, it seemed a little incongruous, after all Argos is low cost to the core. But what if you could make Argos more like Sainsburys or Marks & Spencer? What if it could sell both thecheap and cheerfulproducts that Argos is famed for, and also start selling products thatare just that little bit more interesting, more carefully-crafted, more fun? These products would increase margins, and move the store upmarket. Plus cross-selling opportunities would mean Sainsburys could cater for more of the value market consumers whotraditionally shop at Tesco (LSE: TSCO).
Tesco, squeezed by price-conscious customers
This clever strategy is the main reason why Sainsburys is the onlyone of the big supermarkets thats maintaining and growing its profitability in the face of fierce competition from Aldi and Lidl.
Bycontrast, most shoppers at Tesco are thinking about squeezing as much value from their weekly shop as they can. If Tesco cant beat the prices of rivals such as Asda and Morrisons, then people will buy their groceries elsewhere. To stop this exodus, the company has had to cut prices, and this has led to falling profitability.
Thats why Tesco is in a far more difficult situation, as its being assailed at both the low and high ends. But it has, at least, arrested the fall in sales. I think Tesco is that little bit more plush than it used to be, with cafs and restaurants. But its no longer the money-making machine it once was. A forecast 2016 P/E ratio of 35.07, with a dividend yield of just 0.69%, looks expensive. This compares with a 2016 P/E ratio of 10.88 and a dividend yield of 4.56% for Sainsburys.
It wasnt that long ago that Sainsburys was the whipping boy, while Tesco was carrying all before it. But today Sainsburys looks like a promising high-yield play, while Tesco is one (still) to avoid.
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Prabhat Sakya 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.