The UK grocery market was worth a staggering £169.7 billion last year, according to retail analysis company IGD.com. It could be worth close to £206 billion by 2018 – an increase of more than 21%.
When you look at UK retail spending, almost 55p in every pound is spent on groceries, so this is undeniably a booming sector. But which supermarket should you invest in? The beleaguered Tesco (LSE: TSCO)? The steady pair of hands, Sainsbury’s (LSE: SBRY)? Walmart (NYSE: WMT.US)-owned ASDA? Morrisons (LSE: MRW) or Ocado (LSE: OCDO)? We’ve taken a Foolish look…
There’s no doubt that Sainsbury’s shareholders have a right to feel smug just now. Although like-for-like sales have fallen for two quarters in a row, this was by a mere 1.1% – a smaller drop than many of its rivals. Not only that but its pre-tax profit for the year to 15 March rose more than 16% to £898 million.
It has focused on quality rather than discounting, but is now investing into the discount brand Netto to scoop a “share of the action”. Some analysts have questioned whether this move will simply encourage the discount sector to further undermine established brands like Sainsbury’s. However, others argue it will widen the retailer’s customer base and help future-proof it against the growth of the discount stores.
In the 12 weeks to 25 May, ASDA grew its market share from 17% to 17.1%, according to research from Kantar Worldpanel. Meanwhile, Tesco, Sainsbury’s and Morrisons all lost market share.
In fact, the supermarket was the only large grocer to grow its market share year on year. Walmart investors may hope this means the supermarket can simultaneously compete with the discounters and the other large grocers.
Following a disastrous set of first-quarter results, Morrisons staged a fight-back against the discount brands. It has formed a £1 billion plan to drastically cut prices, bringing down the cost of many everyday essentials by up to 17%.
However, independent analyst Louise Cooper warned earlier this year that the company was only just catching up with other supermarkets by developing online shopping and loyalty cards, “let alone the changes happening now”. She accused the company of a lack of urgency in its efforts to win back market share.
Online-only grocer Ocado has just released an encouraging set of first-half figures. It reported a pre-tax profit of £7.5 million for the six months to 18 May, which is a vast improvement on its performance last year when it saw a loss of £3.8 million.
And Ocado is also busily growing its business. Its specialist online pet store Fetch is reportedly doing well, sales of its own-label range have increased by more than 50% and it’s planning to launch a specialist kitchen and home website later this year.
What about the behemoth of UK supermarkets, Tesco? Performance has been undeniably poor just recently with its worst-ever decline in quarterly sales announced earlier this month. And that follows its disastrous forays into the US and accusations that it neglected its customers at home. But could now be the time to buy and gain on a storming recovery?
Chief executive Philip Clarke pledged to invest a further £200 million into cutting prices, but some analysts said that simply didn’t go far enough to win back customers from the discounters – after all, it hardly compares to Morrisons’ £1 billion plan.
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Felicity does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Tesco.