Once-hearty supermarket giant Tesco (LSE: TSCO) is now sickly, stricken by profit warnings, accounting scandals and disillusioned customers.
But it is still the UK’s largest retailer and still has a fighting chance of returning to health. Rumours of its death have been greatly exaggerated.
Not Dead Yet
The vultures aren’t only circling around Tesco. J Sainsbury (LSE: SBRY) and Wm. Morrison Supermarkets (LSE: MRW) have also fallen victim to shifting consumer trends, as people abandon the big weekly shop to pick up bits and pieces when they need them, or load up at German discounters Aldi and Lidl.
Tesco, Sainsbury’s and Morrisons are now the squeezed middle, losing share to the discounters at bottom of the market, and posh shops like Waitrose at the top.
But they aren’t dead yet, according to a new report from Andrew Herberts at Thomas Miller Investment. He reckons all three can mount a recovery, in part by making better use of the space in their vast out-of-town hypermarkets.
“Sainsburys has made a start with a tie-up with Netto, and Morrison has essentially already declared a price war. Tesco, with the highest market share, has most to lose, but it also has the assets and scale to fight its corner… and sacrifice margin.”
This Means War!
The discounters may be bonny and bouncy today, but Herberts says there is a natural limit to their growth under current business models. If they try to match supermarkets for product choice and brand availability instead, they will embark on a war they can’t win.
With Morrisons, Tesco and Sainsbury trading below the value of their net assets, further value destruction could follow. But in the end, the big supermarkets will adapt, and survive.
Kill Or Cure
The battle is on. Investors beware: margins will fall. So will market share, as newly-emboldened Aldi and Lidl continue their aggressive expansion plans, and the internet snatches more customers.
Stagnant wage growth will continue to drain shoppers’ wallets. But in the end, Tesco, Sainsbury’s and Morrisons still offer something that nobody else does, and we still need them.
New Tesco boss Dave Lewis certainly needs to apply drastic medicine to his ailing business, but he may also discover that it’s in better health than today’s share price, down 50% in a year to 180p, might suggest.
You might want to buy now before the patient recovers.
