New boss Dave Lewis has won plaudits for the way he has set about restoring ailing fortunes atTesco (LSE: TSCO) (NASDAQOTH: TSCDY.US). Markets were even willing to overlook the small matter of the recent 6.4bn pre-tax loss, the largest ever announced by a UK retailer.
This weeks final results at J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) were also viewed leniently, even though it posted its first annual lost in a decade and slashed its dividend by nearly one-fifth.At least the 15% drop in underlying profits to 681m beat gloomy market expectations of 654m.
The general feeling was that things could have beenworse, and maybe, just maybe, one day they will get slightly better. But that day isnt upon us yet.
Birth And Death
It is hard toshake the feeling that buying Tesco and Sainsburys involvesinvesting in a declining sector of the grocery market. Especially when you look at Aldi and Lidl.Trade journal The Grocer has just reported that the two German discounters have 33 and 20 projects lined up respectively for 2015, as they continue their aggressive expansion plans.
By comparison, Tesco has just three while Sainsburys trails with two (although it hasdisputed The Grocers figures, sayingit plans to open eight superstores in the next three years).Last year, Tesco was laying out only slightly less floor space than Aldi. This year, Aldi is laying 10 times as much.
Tesco and Sainsburys are retrenching, Aldi and Lidl are booming, confident and scenting blood.
At some point, the onward march of Aldi and Lidl will halt. Their novelty status may already befading. Some customersare starting to complain that the quality isnt there.
Not everyone wants to head down-market anyway. The big supermarkets are slashing prices, and the price differential isnt as wide as it was.
This years expansion plans could even be the discountersmoment of hubris.
Weak And Wilted
Chief executive Mike Coupe is confident that his strategy can turn Sainsburys round, and reckons his strategy of investing in price and quality is showing encouraging early signs of volume and transaction growth.
Tescos Dave Lewis clearly knows what hes about, although may have created a rod for his own back, as investor expectations rise a little too fast.
Both supermarketswill inevitablylose further market share as they wilt under this latest assault from their fresher and crisper rivals. The discounters will find their natural level at some point, but thatwillbehigher than it is today.
Tesco and Sainsburys look set to stay soggy for some time yet.
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Harvey Jones 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.