2014 has been a highly disappointing year for investors in the major supermarkets. For example, Morrisons (LSE: MRW) is down 28% since the turn of the year, while Sainsburys (LSE: SBRY) has seen its share price fall by 16% over the same time period. Both companies have severely underperformed the FTSE 100, which is up 1% so far in 2014. However, the future could be a lot better for investors in the two companies. Heres why.
The Right Strategy
When things are tough, having the right strategy becomes all the more important. Certainly, during the good times a sound strategy can make a positive contribution to top and bottom line growth, but its when trading conditions are highly challenging that strategy appears to have the biggest marginal return.
So, Sainsburysdecision to split its brand between the traditional, mid to upper price-point Sainsburys brand, and a discount, price-focused Netto brand (via a joint venture with Netto) seems to be highly appealing. Not only will it help the Sainsburys brand to avoid being derated in terms of losing its reputation as a brand that focuses on quality and service (as well as value), it also allows it to specialise as a discount retailer. Indeed, one criticism of the big supermarkets is that theyve tried to become all things to all men. Through a split of its brand, Sainsburys could maximise sales by being able to cater to the very different demands of discount shoppers and mid to premium shoppers.
Likewise, Morrisons long term strategy to rapidly expand into the online and convenience store markets seems sound. It has missed out on the double-digit growth rates that rivals such as Sainsburys have benefited from in recent years in these areas. As a result, Morrisons could be wellplaced to grow its top and bottom lines over the next few years. For example, as early as next year its earnings are forecast to increase by up to 17%, which would be a big step in the right direction.
Looking Ahead
Clearly, shares in Morrisons and Sainsburys are cheaper than they were at the start of the year. However, they may offer better value, too, as both companies seem to be making the right moves to improve their sales and profitability moving forward. Certainly, these changes will take time to come good, but with shares in Sainsburys and Morrisons trading on dividend yields of 5.4% and 6.1% respectively, more challenges appear to be adequately priced in. As a result, both stocks could surprise on the upside and turn out to be strong performers over the long term.
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Peter Stephens owns shares of Morrisons and Sainsbury (J). We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
