I reckon two prominent investment themes of recent years are the busting of the myths that big banks and big supermarkets make decent buy-and-forget investments.
With the banks, it seemed that, previously, many ignored their own lack of understanding of the nuts and bolts of how banks actually made their money in the modern era. They also ignored the high financial gearing needed to turn out big profits. Instead, many focused on the comforting existence of well-known banking names, low-looking valuation measures and high dividend yields as justification for diversifying into the banking sector, despite the notorious cyclicality of the industry.
With the supermarkets, I think investors ignored the fundamentals of supermarket businesses. The sector is a high volume, low margin industry with fragile economics — little shifts in the big numbers of revenue and costs can have devastating consequences for the small number that is profits. I think investors have always known that, but the consumable nature of food retailing led many, including me, to believe that supermarkets had consistent cash flow that therefore made them defensive investments.
Why the supermarkets suck as investments
Events over recent years have shown how wrong we investors were about the banking and supermarket sectors. It hasn’t taken much to upset the fine balance that supermarkets maintained — just a small upsurge in competition from deep-discounters. The myth is busted. Supermarkets suck as investments.
According to market researchers Kantar Worldpanel, things are getting worse for Britain’s big four supermarkets. The assault from up-and-coming chains — Aldi and Lidl in particular — seems relentless. All four of the big supermarket chains in Britain saw sales decline during the 12 weeks to 24 April — Asda down 5.1%, Tesco’s (LSE: TSCO) fell 1.3%, WM Morrison Supermarkets (LSE: MRW) dropped 2.6% and J Sainsbury’s (LSE: SBRY) eased by 0.4%.
That’s not all down to loss of market share, because prices of groceries in Britain have been declining every month since September 2014 due to the sector’s price war with Aldi, Lidl and other discounters. However, it’s illuminating to see how the challengers came out of the same period — Lidl saw sales balloon by 15.4% and Aldi by 12.5%.
This problem is staying
Lidl is Britain’s fastest growing supermarket.
Wow! Let’s think about that for a moment.
Lidl and Aldi are eating the big four supermarkets’ lunches. The threat to the big four is gathering pace and starting to reach critical mass. I see anecdotal evidence for the enduring nature of the trend in my own area — Lidl plans to knock down a store it built just 11 years ago in order to build a larger one on the same site. That’s concrete evidence of material market share gains if ever I saw it.
The big four supermarkets remain decent places for shopping in but I think it’s time to dump Tesco, J Sainsbury and WM Morrison Supermarkets as investments.
