Are supermarkets past their sell-by dates?

28th June 2012

Yesterday Wm Morrison saw its share price slip, after finance director Richard Pennycook announced he would be leaving, as reported in The Independent.

Doubts have been expressed about Morrisons belated move into convenience stores, online groceries and higher quality food. Even previous chief executive, Sir Ken Morrison, was wary about Morrisons' current strategy, warning that it looked "more like Waitrose than like Asda".

Tesco, Britain's biggest food retailer and previously the golden boy of the supermarket sector, reported six successive quarters of falling like-for-like sales earlier this month, as covered in the Guardian. Mindful Money has previously queried whether Tesco has had its time.

Tesco is potentially a victim of its own success, according to Darius McDermott, managing director at Chelsea Financial Services and Mindful Money blogger.

McDermott said: "Tesco has done so well for so long, that as soon as it reports a slight reduction in its numbers, it tends to get hit on its share price".

Online grocers are not exempt. Today Ocado shares crashed 20%, after the web-based retailer admitted missing the boat on a Jubilee boost, and warned that the Olympics could increase delivery costs.

Ocado's lacklustre response to the Jubilee contrasted with the rest of the supermarket sector, which saw the grocery market grow 3.2% overall, based on calculations by consume research specialist  Kantar Worldpanel.

Analysts remain concerned about how Ocado will fare relative to aggressive price promotions pursued by Asda, Sainsburys and Tesco, according to The Daily Telegraph.

Tipped for the top or bargains at the bottom?

Opportunities for supermarkets may yet be brighter during a recession than for other UK retailers. McDermott explained: "During a recession, we still have to eat. Food is normally a solid area in difficult times, unlike discretionary spending that tends to get hit first, as consumers decide not to buy the big TV or nice diamond ring.".

During the current downturn, McDermott highlighted how success might be skewed to the top and bottom of the groceries market.

He said: "At the top end, supermarkets like Waitrose and Marks & Spencer with strong brands have done alright.

"Otherwise people are tending to move to cheaper supermarkets, but companies like Lidl and Aldi aren't quoted on the UK stock exchange.

Guy Walker, equity analyst at Schroder Investment Management, also zoned in on success of the private companies at either end of the UK supermarket sector.

He said: "It is interesting that the most successes food retailers in the UK are unquoted, either Waitrose or the hard discounters Lidl and Aldi.

"I believe that these operators are successful because they are more focused and more nimble than companies such as Tesco or WalMart ASDA and give shoppers what they want.

"It is not all about price, it is about being perceived to share the same values as your customers and offering them something special."

Going for gold with grocers

While expressing caution about the supermarket sector, Walker tipped Morrisons for those investors looking for quoted companies.

He said: "In these difficult times Morrisons remains an attractive investment, with a single digit price to earnings (P/E) ratio. It has a strong balance sheet, which supports an attractive dividend yield of 4.5%, focused management, and a sensible capital expenditure investment strategy."

Meanwhile McDermott recommended Sainsburys as "the clear winner".

Sainsburys outshone Tesco earlier this month, when it bucked the trend of other supermarkets to report sales growth particularly in online shopping, convenience stores and clothing.

Matt Piner, lead consultant at retail analyst Conlumino, also singled out Sainsburys in International Business Times UK for hitting a good balance between value and quality when communicating its proposition to customers.

Sourcing beyond supermarkets

Elsewhere among UK retailers, Walker highlighted Next and Debenhams for strong cash generation and safe balance sheets.

Currently, Next has a free cash flow yield of 9%, and a P/E ratio of 11 times, while Debenhams has a free cash flow yield of 10% and is trading at P/E ratio of 8.

Walker said: "Next and Debenhams are two retailers that combine cheap valuation and quality businesses."


More on Mindful Money:

Has Tesco had its time?

Under Pressure: Tesco, AstraZeneca & Barclays

Diageo and GlaxoSmithKline: When debt is good for investors

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