We compare the prospects of J Sainsbury plc, Tesco PLC and Wm. Morrison Supermarkets plc.
We're in the midst of the Christmas reporting season, when analysts pore over the sector's festive sales. William Morrison (LSE: MRW) published its figures on Monday, J Sainsbury (LSE: SBRY) reported today and Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) presents its figures on Thursday.
Tesco's numbers will, perhaps, be the most anticipated, as it marks the anniversary of its now infamous 2012 profits warning -- the company's first in 20 years.
But it would be wrong to put too much emphasis on Christmas trading. The Financial Times points out that only twice in the past five years has the supermarket chain with the best Christmas sales gone on to deliver the best share price performance in the following year. Supermarket sales are not as seasonal as, say, the drinks industry.
So what are the listed supermarkets' prospects in 2013? My guess is that there'll be one winner, one loser and one that treads water.
It's Morrisons' management who find themselves in the naughty corner this January. But although its 2.5% fall in like-for-like sales over Christmas have caught the headlines, there are more deep-seated issues that will weigh on its shares this year.
CEO Dalton Philips has finally admitted that the chain is behind the curve in both online grocery sales and convenience stores. Previously, the company's language had an air of 'we'll wait and see what mistakes the others make'. But Morrisons is now playing catch-up. That will take time and money.
It will also absorb management attention, and a number of high-profile defections last year suggest all may not be well at the top. In any case, a new management team will be bedding in. Among last year's departures were the commercial director who had only joined (from Waitrose) two years earlier, the marketing director and the HR director. Finance director Richard Pennycook will leave in June.
And structurally, Morrisons' strengths are in the north of the country, which won't see much in the way of economic recovery this year.
Top of the class
If Morrisons is in the naughty corner, Sainsbury is currently top of the class -- at least among the three listed supermarket groups. In fact, the real star pupils are those associated with the two extremes of quality and value: John Lewis-owned Waitrose, and the 'hard-discounters, Aldi and Lidl. Consumers are either saving their pennies or treating themselves, and these companies offer a distinctive message of one or the other.
Sainsbury had a good 2012. Its sponsorship of the Olympics paid off and the last quarter's figures, released today, show underlying sales up nearly 1%. The group boasts eight years' worth of quarterly sales growth -- that's quite a feat.
But its strong sales performance is factored into the shares, which have risen 11% over the past 12 months, compared to drops of 10% for Tesco and 20% for Morrisons.
So my tip for the most promising supermarket chain of 2013 goes to Tesco. This will be the second year of its turnaround plan, and investors might reasonably hope to see some results starting to come through.
Of course, it's a long haul to reinvest in the core UK grocery business, which was neglected in favour of Tesco's sexier diversifications and international business: too many after-school activities and not enough attention to the three 'R's, you might say.
But having been chastised by the market, there's no doubt it's working to correct that. With the dominant UK grocery market share -- at around 30% roughly equal to Sainsbury and Morrison combined -- it's a powerful competitor, which could make it a tough year for the other two.
Tesco's quarterly results tomorrow are unlikely to set the world on fire. Industry estimates suggest it simply reduced the decline in like-for-like sales. But positive things to look out for include any progress on its 'review' of the US Fresh 'n Easy chain, where it has finally capitulated after years of mounting losses, and management changes in the UK. Pundits are speculating that CEO Philip Clark will step back from day-to-day control of the UK business, which to my mind would be a sensible move.
One investor who will be looking out for Tesco's results -- but not swayed by a single quarter's performance, for sure -- is Warren Buffett. The veteran US investor has been a major shareholder since 2006, and topped up his holding last year after the company's profit warning. What's more, it's the only UK share he holds.
You can learn more about Mr Buffett's investment in this free report from the Motley Fool: "The One UK Share Warren Buffett Loves". Just click here to download it to your inbox now.
> Both Tony and The Motley Fool own shares in Tesco.
(An amendment to this article was made on 11/1/2013, removing 'Asda-owned' preceding "Aldi and Lidl".)