Supermarkets are trying to regroup and it isn’t easy. Once they were top retail dog in any town, and your property was worth more depending on how close it was to the nearest big grocer.
But that easy supremacy has been over for a while and the performance of the sector is down and difficult to predict.
For a start, in the UK what customers want has changed. They like shopping online, workers like nearby smaller outlets. A rising over-60s demographic means that there is less demand for a big shop.
Shoppers are more health aware, they like healthier food, organic and exotic produce. They like value-added items such as cut up fruit or salads in a plastic box. They like more ready prepared and ready to eat foods.
The slings and arrows of supermarket misfortune
More people shop online so those-out-of-town grocery outlets are less visited. Online shopping took a while to become established but now even M&S has indicated it plans to offer online food for its customers.
In the UK supermarkets battle against a decline in sales, unexciting returns and dividends, as well as increased competition thanks to the recent thrust of cheaper chains such as Lidl and Aldi.
The market share of these two German firms together has risen by 80% since mid-2013.
Reasonable food prices, indeed cheap for the consumer for so long, are now rising with inflation.
According to US market researcher Kantar Worldpanel, British supermarkets recorded their highest sales growth in five years at 5% over the last 12 weeks to mid-June largely on the back of growing inflation. Morrison did best of the Big Four with a 3.7% rise.
However, greater sales on the back of inflation is two-edged because shoppers’ incomes haven’t risen in the same way and they may cut back on groceries or call on Aldi and Lidl.
The oligopoly – how it breaks down
Unlike like sectors where there are plenty of players, there are just a handful among supermarkets. They are described by economists as an oligopoly where a small number has a large majority share (as opposed to a monopoly).
Do you remember Bejam? Carrefour? Gateway? Presto? Kwik Save? Somerfield? They are some of the many supermarkets in the past 40 years that have been swallowed up.
Booker, owner of smaller chains like Londis, Budgens and Premier stores, looks set to be bought by Tesco £3.7bn. The Competition and Markets Authority is checking out the deal.
The old style Co-op still has lots of stores
The venerable, and some say vulnerable, Co-op grocery chain, dating back to 1844 has a distinctive ethical stance.
In 1948 the Co-op was the first in Britain to set up a full self-service store in Southsea, Portsmouth. Although it has around 2,800 stores, it has had lots of problems.
The importance of market share
In the UK the Big Four’s market share was mid-June: Tesco (27.8%), Sainsbury’s (16%), W M Morrison 10.6%. All are quoted. Asda (15.1%) is part of the quoted US Walmart. Aldi took 6.9% share and Lidl 5%.
Then there are the two popular upmarket chains: unquoted John Lewis’s Waitrose, and in addition to its in-store groceries, the quoted Marks & Spencer continues to expand its M&S Simply Food.
The unquoted German kids -on-the block Aldi and Lidl are a threat to all the supermarket companies. In 2015 Aldi overtook Waitrose as the sixth biggest supermarket. Lidl is closing on Waitrose for 7th place.
Another cloud in the sky for the Big Four is Amazon, which has bought organic Whole Foods in the US and has been trialling food delivery in Britain.
Marks & Spencer (LON MKS) is concentrating on food because its traditional interest, clothing, is lack lustre. It closed 80 stores in 2016. It is tipped to hire Ocado (LSE OCDO), which already delivers groceries for Waitrose, to deliver M&S food to homes.
Sainsbury (LON SBRY) bought Argos in 2016 for £1.4bn as a way of diversifying into the homeware market.
What affects the share price of companies in the sector?
As one analyst put it, the sector is beleaguered and the share price is currently particularly sensitive to news concerning competition and margins.
What can make one company buck a sector trend?
A company share price can do better than others in the sector when there has been an initiative. For example, the market thinks that Tesco hopes to buy market share by acquiring Booker’s stores makes sense.
Also Tesco (LON TSCO) announced it would make 1,200 redundant at its head office in a bid to cut £1.5bn costs. This sort of initiative helps builds market confidence.
What can make a company’s share price plummet?
The downers include a reduction in market share and/or squeezed margins leading to reduced profits.
For example, the Co-op’s share price has suffered of late because of a rogue CEO, the losses on the sale of its Co-op Bank, and quick changes in top personnel.
What to look out for in a company's accounts
A useful pointer about how a supermarket is doing is to study like-for-like sales over a quarter, six months and a year.
It’s good to study supermarket property portfolios which for the Big Four are considerable and provide welcome share support given negative issues. There is increasing relevance of supermarkets turning unwanted grocery space into much needed housing.
What else is there to watch out for?
The performance and investment issues with big supermarkets are broad brush compared with some other sectors. But be alert to grocery price fixing and the resulting fines which have stung Tesco. Be aware of market competition problems, especially to do with takeovers (see Tesco and Booker above).
It may be that supermarkets have nothing special. In which case a line saying something such as “Supermarkets are simple and have little hidden under their packaging. What you see is what you get.” However, it may be you could say watch out for unnecessary expansion, especially overseas as I am sure some have had to sell off foreign business. Or maybe competition investigations? If you could ad a line or two that would be great.
Will any one stock pull ahead?
Like super tankers, supermarkets are so big they take a time to change direction and it’s debateable which company might pull away from the rest.
The shares of quoted supermarket companies are not currently enticing. Latif Khalaf, retail sector analyst at Hargreaves Lansdown comments: “Supermarkets are out of favour and they would be a contrarian choice right now.
“It’s a precarious time for them, there is so much competition. There is also a number of head winds, not least an upcoming consumer squeeze with inflation on the rise.