Fallen share prices in the supermarket sector might make firms such as WM Morrison Supermarkets (LSE: MRW), Tesco (LSE: TSCO) and J. Sainsbury (LSE: SBRY) look tempting but I’m resisting the urge to buy shares in those companies.
Contraction could go further than we think possible
There’s a tendency for me to anchor on the old pre-crash values for share prices and profits and to start thinking that a recovery to those values — a turnaround — might be possible. Such thoughts probably drive most new shareholders into the supermarkets at current share-price levels.
However, I learnt something from ex-Dragons’ Den star Richard Farleigh that he delivered in his investment book Taming The Lion, which makes me think again. Farleigh has it that markets and trends tend to go much further than we believe possible.
In the case of the structurally challenged supermarket sector now, I think it’s possible that the old established firms such as Morrisons, Tesco and Sainsbury could face ongoing market-share attrition. Discounting competition from other players such as Aldi, Lidl, Poundland, B&M and others could advance much further, and grab more market share, than we might think possible.
If that happens, Morrison, Tesco and Sainsbury could find their market shares and profits in decline for years to come.
Shrinking supermarket chains
The ongoing fight for survival faced by the big supermarket chains means they may need to change their ways to align with the methods of firms such as Aldi and Lidl just to tread water. Giving more quantity and quality for less money seems like a trend that is here to stay in today’s cash-strapped world. It’s a trend set to go further than we believe possible, I reckon, and that doesn’t bode well for a recovery in the profits and share prices of the big supermarkets.
I’ve wondered for a while whether we could be at the beginning of a controlled shrinkage of these once-mighty supermarket empires. Where once they were set on growth and market-share gains we may be seeing a juddering lurch into reverse gear for the big supermarkets. Perhaps from now on the underlying businesses could be unwound to match their ever-reducing market shares.
Tesco’s proposed sale of its star-performing Korean arm and Morrisons plans to ditch its once bright hope the M-Local convenience store estate suggests that asset-shrinkage is off to a good start. It doesn’t take a huge leap of the imagination to see the big supermarkets moving beyond non-core assets to disposals within their core supermarket estates in the UK. Perhaps under-performing stores first. Perhaps such real estate will move into the hands of the very discounters responsible for the carnage in the supermarket sector — stores closing one week as Tesco and opening the next as Aldi, for example!
What are the likely catalysts for recovery at the big supermarkets?
I struggle to see anything on the horizon that could re-ignite the big supermarkets businesses and propel them to former glories. Perhaps as the macro-economic cycle matures consumers will become more affluent for a while and get lax with their penny pinching, meaning they become more willing to shop ‘expensive’. If that happens it’ll probably just be a blip in the data. I think the move to the discounting model in the supermarket sector is structural, and could go much further than we think possible viewed from here.
At some point supermarkets such as Wm Morrison, Tesco and J Sainsbury could find equilibrium at lower levels of profit than we’ve seen, perhaps due to local geographical and economic trading moats around some of their stores. However, that not enough to tempt me into buying into recovery hopes for the supermarkets.
