J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) has triumphed in the war of the big four supermarkets, but now its winning streak has come to an end. Its proud record of 36 consecutive quarters of growth has fallen. Total sales (excluding fuel) in the quarter to 15 March fell 3.1%, the first drop in nine years.
Oh What A Lovely War!
That was predictable (even I predicted it), given that it only scraped 36 by a whisker. But the glory days are over, and the future looks tough. Sainsbury’s now has a fight on its hands, on every front.
First, it is losing a charismatic chief executive. Justin King, who steps down in July, would have preferred to exit the field unbloodied and unbowed, but Sainsbury’s still has a lot to thank him for. On his watch, the supermarket has been taking market share, as the rest of the big four surrender theirs, notably Tesco. His successor Mike Coupe has a fight on his hands to establish his credentials in the heat of an increasingly intense battle.
Maidstone Surrenders
The supermarket wars are getting tougher, following the unexpected territorial gains made by Aldi and Lidl. Their low pricing strategy has won the hearts and minds of ‘Maidstone Mums’ across the country, a previously unknown force who wouldn’t have been seen dead shopping at a discount supermarket during the boom. None of the big four quite knows how to respond to this foreign invasion, which is worrying, given ambitious German growth plans.
Sainsbury’s also faces a wider strategic battle. The invasion of the discounters has heightened the sense that the big supermarkets are in structural decline. And how are they responding? In the time-honoured way of falling out amongst themselves, in the shape of a price war. WM Morrison, the bottom feeder of the big four, started it, by pledging to knock £1 billion off its prices over the next three years. Tesco been sucked into the battle, sacrificing its 5.2% profit margin.
Sector Slaughter
Sainsbury’s has been unable to stay aloof. It has lowered the price of bread, milk and eggs, while playing the PR game by pledging to pay a “fair price to farmers”. That’s quite a balancing act to pull off. King denies that Sainsbury’s is in a “race to the bottom”. He also pointed out that Sainsbury’s has held its market share at 17%, boosted convenience store sales by 15%, and recorded one million transactions a day for the first time.
But it’s the relative success of Sainsbury’s that really worries me. Over the last five years of a splendid bull market run, its share price has grown less than 2%. In the same period, the FTSE 100 returned 72%. True, Sainsbury’s has trumped Tesco, which fell 8%, and Morrisons, down 12%. But this has been a dismal sector to invest in, given that even the winner doesn’t take the spoils.
The supermarket sector looks like a war zone, and the battle is set to intensify. At 10.2 times earnings, brave investors may be willing to put their boots on and sign up for Sainsbury’s. They will be tempted by the current yield, a blast-proof 5.3%. But I’m off in search of more rewarding battlefields.
