Aggressive competition is squeezing the bottom line.
Supermarkets are generally considered to be good defensive shares in troubled times (and they can be pretty decent investments during good times, too). People still need to eat, and they'll turn more to eating at home when the cash is short.
But in its Christmas update, we heard that Wm Morrison (LSE: MRW) is finding even that sector tough going, with like-for-like sales in the six weeks to 1 January up just 0.7% on the same period last year (excluding fuel and VAT). That's a significant slowdown from the 2.4% growth recorded in the third quarter and shows that, despite attracting 800,000 more customers per week, even Christmas food shopping has been cut back this year, with people buying cheaper foods and less posh booze.
Increased competition among the big supermarkets is also taking its toll, after Tesco (LSE: TSCO) started a new round of price wars earlier this year, and further pushed its 'Big Price Drop' promotions over Christmas.
Rivals have been pretty much obliged to follow, and part of Morrisons' response has been to launch its own-brand value label, "M Savers", and its "M Kitchen" range of ready meals.
Tougher year ahead
But despite the slowdown, Morrisons is still apparently on track to meet its full-year expectations, largely because the tough conditions were foreseen and estimates were tailored accordingly. As for next year, tough trading is expected to continue, and we're unlikely to see more than about 1% sales growth.
What does this say about investing in supermarkets? Well, we really need to wait to hear from the other big ones, with Sainsbury (LSE: SBRY) due to report on Wednesday and Tesco on Thursday (and the rumours are that Tesco's price war hasn't been as effective as hoped).
But if a slump in growth is the worst that happens, while other sectors are seeing sales and profits tumbling, it's really not that bad a position to be in and we should still expect decent dividends across the sector -- Morrisons is forecast to deliver about 4% next year, with rivals offering similar yields.
So there's no need to panic -- the supermarket business is still a good one to have your money in.
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> The Motley Fool owns shares in Tesco.