Can Tesco, Sainsbury's & Morrisons survive the discounters' onslaught?
Another day, another sign of the discounters' encroachment on the traditional supermarket sector. According to research from IPD and Colliers, the property agents, Aldi is planning to open more new supermarket space this year than Tesco (LSE: TSCO), Sainsbury (LSE: SBRY) and Morrisons (LSE: MRW) combined.
Aldi is the more aggressive of the two German discounters, having doubled its market share since 2012. But that share is still only 5%. There is clear blue water between it and Morrisons, the smallest of the big four, with 11%. Altogether the big four - including Walmart-owned Asda - control three-quarters of the market. Reports of their death have been exaggerated.
Nevertheless, the sector is changing fast. Marks and Spencer has the second-largest new food-store building programme. The big four supermarkets fight each other over a pretty generic middle ground, whilst their collective market share is chipped away by the discounters at one end and the premium players at the other.
Which has the best long-term prospects?
Tesco's dominant market share should stand it in good stead in the long term. For all the drama surrounding the company since its seminal profit warning in 2012, its market share has slipped from just over 30% to a little under 29%. But margins, profits and dividends have plummeted in that time. It's only faith that new CEO David Lewis can pull off a successful turnaround that is sustaining the shares at their current level, on a nominal forward PE of 25 times and yielding under 1%.
Sainsbury's new-ish CEO is feeling chipper, claiming to see 'some green shoots of recovery'. It has a slightly more distinctive positioning and differentiation through its own-brand labels, and its if-you-can't-beat-them-join-them joint venture with discounter Netto is a clever way of hedging bets. It is less weighed down by out-of-town megastores than Tesco and is trading on sensible forward multiples.
Morrisons has consistently lagged the other players, but failed to learn from their mistakes. It's now catching up on the vogue for management change, with a new CEO having joined this month. There is a fundamental disconnect between Morrisons' vertically integrated quality positioning - such as outgoing CEO Dalton Philip's in-store fruit and vegetable misting machines - and its Northern geographic bias, whilst its online business is locked into a 25-year contract with Ocado (LSE: OCDO). As the smallest of the big four, Morrisons is the most vulnerable.
Online challenge
The barely profitable online operator Ocado is highly dependent on that contract. Mr Philip's ousting, and an excoriating broker's note in which Deutsche Bank called it a niche business with limited expansion potential, have hammered Ocado's shares this year. Few would relish being in a business that Amazon might choose to dominate.
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