An announcement Thursday is good news for Morrisons (LSE: MRW) customers, but I’m really not sure it boosts the attractiveness of the supermarket chain’s shares.
The firm is offering an ultra-fast delivery service, labeled Morrisons at Amazon, in partnership with the famed online retail giant. Described as an “ultra-fast same day, online grocery home delivery service,” it offers Amazon Prime Now customers delivery as fast as one hour from placing the order. The order will be picked at Morrisons and then collected and delivered by Amazon.
Initially serving Leeds, Manchester, Birmingham, and parts of London and the home counties, it will be rolled out further in 2019 to “other cities, including Glasgow, Newcastle, Liverpool, Sheffield and Portsmouth,” and then beyond in future years.
Competition
This is an example of the increasing flexibility we have when buying things online and it’s sure to benefit customers. But at the same time, it serves as a reminder to me of the increasingly competitive nature of the groceries business in terms of prices and speed — and what that costs.
Even with a charged service, online supermarket shopping deliveries are run at a loss and cut into the already fine margins that sellers earn on the products they provide. And it’s being done in a rush to gain market share.
But I mentioned recently how that doesn’t seem to be working for Tesco and Sainsbury, which aren’t seeing the growth investors might hope for in these days when Lidl and Aldi are ramping up their sales hand over fist.
The big problem for me, as an investor, is that I see too many players in the market. Tesco, Sainsbury, Asda, Morrisons, Aldi, Lidl, Ocado, Marks & Spencer, Waitrose, Co-op, McColls…
I just don’t see enough profit to go round and to keep them all growing their earnings and their dividends indefinitely. And I really do expect some in that list to suffer in the coming years — especially now we know we shouldn’t expect consolidation at the top end of the market after the attempted Sainsbury/Asda merger was halted.
Fundamentals
Having fallen over the past 12 months, Morrison shares look reasonably attractive at first glance, with a forward P/E dropping to around 15 by 2021 while the forecast dividend yield grows to 3.3%.
There are some impressive earnings growth forecasts being bandied about for the sector too. EPS at Morrisons is predicted to soar by 34% for the year to January 2020, with a rise of 21% on the cards for Tesco for a similar period.
But this is in a time of serious readjustments, characterised by changes in focus, in capital expenditure, in costs… and surely can’t be representative of the long-term earnings prospects for these companies. There just isn’t the market growth available to sustain long-term high earnings growth for all — and the signs increasingly suggest the lion’s share of what growth there is will go to Lidl and Aldi.
Longer term, when (hopefully) the economy and the groceries business have settle down a bit, I’d be surprised if the big three quoted supermarkets can achieve more than EPS growth levels in line with inflation — if that. And that’s not a market I want to invest in.
