Could the retail giants rise again? M&S stock has held up and shares yield 5% - but Sainsbury's and Tesco could be due a comeback...
Struggling retailers have blamed a warm winter for poor sales, but the major supermarkets have bigger problems than the weather.
‘When there is pressure on costs, sales volumes and margins it doesn’t leave profitability in a very good place,’ says Chris White, head of UK equities at Premier Asset Management.
For a long time the so-called Big Four – Tesco, Sainsbury’s, Asda and Morrison – ruled the retail roost. They moved from High Street locations to out-of-town retail parks and chose to focus on speed and profit.
Struggle to sell: M&S has been outperforming big mainstream grocers.
But the UK consumer has changed. No longer do they want to be dealt with as quickly as possible. Instead good service and a positive experience have become more important.
Convenience is paramount, with several small, top-up shops preferable to one big weekly trip. Shoppers want quality and value, not to be bombarded with hundreds of deals, with the integrity of some of those being doubtful.
Step in the discounters. The likes of Aldi and Lidl have cleaned up in recent years as consumer priorities have changed. They are growing fast and have been steadily snatching market share from the giants.
Helal Miah, research analyst at The Share Centre, says: ‘There’s a lot of competition in the retail market and that drives prices down. That means companies have to make a decision – either go premium or start discounting.’
The supermarkets are facing margin squeezes just as sales have started to fall. And on the horizon are the National Living Wage and the prospect of the first rise in business rates since 2008, both of which will drive up costs. With competition so tight, those who have failed to evolve have particularly suffered.
M&S and Morrisons were both slow to adapt to the online age. Miah does, however, like M&S. The food part of its business is strong and the stock yields almost 5 per cent.
He says: ‘We know the firm has had problems for around a decade, particularly with women’s clothing, but last year they had a couple of hits. We hope the new boss will do some restructuring and focus on more attractive clothing lines which will appeal to younger shoppers.’
This ability to diversify will be key to the survival of supermarkets, he believes. It is evident in Sainsbury’s recent bid for Home Retail Group, which owns Argos.
But more of this type of out-of-the-box thinking will be needed if supermarkets wish to thrive.
Food prices are not likely to go up for some time, so unless retailers are willing to take a major hit on their margins they are going to need other sources of revenue.
In the past some supermarkets have introduced clothing lines, but fewer shoppers are buying these as they either become more discerning or look for cheaper alternatives. Homeware and electricals have been decent sellers, but with limited floor space in stores they can only benefit so much from these ranges.
The introduction of a Click & Collect service by bringing a brand such as Argos in stores could be a good solution. It would also increase footfall – if someone is picking something up they are likely to do their food shop while they are there. And the booming housing market could feed in here nicely.
Michelle McGrade, chief investment officer at TD Direct, says: ‘Consumers who are confident about house prices are more likely to buy furniture and household goods. You can see that Sainsbury’s is thinking along these lines with its Home Retail bid.’
Yet McGrade believes Tesco is the one to watch. She says: ‘When Terry Leahy joined Tesco it was a huge change – for a long time it really was a step ahead of the competition. Now it has clearly had a lot of internal problems but if the new boss can turn around the ethos of the company it could do well.
‘Right now, though, it’s too early to tell.’
Tesco’s share price has halved over the past two years, from 326p to 173.4p. Sainsbury’s has fared slightly better, falling from 365p to 245.1p over the same period.
For those investors who believe the retail giants will rise again, the key is to drip-feed your money in if you are buying shares to minimise the effects of any dips in the share price.