As all investors know, 2014 has been a year to avoid supermarket shares. That’s because their performance has been hugely disappointing, with shares in Tesco (LSE: TSCO), Sainsbury’s (LSE: SBRY) and Morrisons (LSE: MRW) falling by 50%, 37% and 33% respectively since the turn of the year.
Of course, a key reason for such declines has been disappointing levels of profitability, which has been caused to a large extent by the increasing popularity and growth of no-frills operators such as Aldi and Lidl. They have gradually eaten away at the market shares of the likes of Tesco, Sainsbury’s and Morrisons, thereby creating a savage price war that seems to have no end in sight.
In addition, Tesco has had a £263 million accounting scandal to endure, which has been a major contributing factor to it having three profit warnings in as many months. The latest one entails a fall in forecast trading profit from £2 billion to no more than £1.4 billion and shows that the company has a long journey back to full health ahead of it.
However, could 2015 be a better year for the established players? Can Tesco, Sainsbury’s and Morrisons really overcome Aldi and Lidl in 2015?
A key reason for the rise of no-frills operators such as Aldi and Lidl has been a squeeze on disposable incomes. Wages in the UK have grown at an incredibly weak rate and, although inflation has perhaps been lower than was first anticipated when QE was announced, it has still meant that the value in real terms of people’s incomes has fallen. This has been the case for a number of years and, therefore, it is little wonder why consumers have become much more price conscious.
Looking ahead, though, the Bank of England expects this situation to reverse during 2015, which means that the spending habits of shoppers could change. For example, they may spend more on higher quality products and branded goods, which could help to boost the likes of Tesco, Sainsbury’s and Morrisons next year. Certainly, if this occurs it will be a slow process, but even the start of a gradual shift in consumer spending habits could be enough to boost investor sentiment in the supermarket stocks over the medium term.
The plan thus far among the major incumbents has been to simply cut prices. That hasn’t worked and, as a result, new strategies are being adopted by the ‘big three’. These include a rationalisation of Tesco’s business, including the potential sale of non-core operating units such as Blinkbox and the recruitment of 6,000 new staff members as the company attempts to differentiate itself from peers via improved levels of service. Meanwhile, Sainsbury’s is itself entering the no-frills segment via a joint venture with Netto and Morrisons is accelerating its online and convenience store expansion in an attempt to appeal to a different type of customer than it has in the past.
Of course, strategic shifts and a change in living standards are unlikely to change the short-term outlook for Tesco, Sainsbury’s and Morrisons. That’s because they will take time to have an impact on the top and bottom lines of the companies operating in the supermarket sector. Furthermore, the short term changes being implemented at the major supermarkets, notably Tesco, could cause considerable short term pain before they start to generate longer term gain.
As a result, 2015 could feel rather like 2014 in terms of supermarket share prices being weak but, looking back on it, 2015 could prove to have been the perfect time to buy shares in Tesco, Sainsbury’s and Morrisons. That’s because next year could be the start of the comeback, with their medium- to long-term futures having the potential to be far brighter than the market seems to currently believe.
