If you’re looking for safe-haven stocks today, then buying into companies that are involved in the production, distribution and sale of food is largely a good idea. But is buying shares in Tesco (LSE: TSCO) a good idea?
On Wednesday Britain’s biggest supermarket chain advised that it’ll take a hit of between £650m and £925m as a result of the pandemic. It blamed “significant cost increases in payroll, distribution and store expenses”as the reason behind the big bill.
While the panic-buying at the start of the crisis has mostly subsided, outgoing chief executive Dave Lewis commented that “there are [still] significant extra costs in feeding the nation at the moment.”
Tesco under pressure
The UK’s supermarkets witnessed a boom in demand at the start of the crisis as stockpiling fever gripped the nation. Tesco saw sales leap 30% in the first few weeks of the crisis. It understandably caused significant problems for its supply chain though.
Sure, the FTSE 100 firm might be over the worst of the supply crisis. But there remain a number of other problems that it is suffering from. Its Booker wholesale division has been struck by “a weak market in both the wholesale and catering sectors”as restaurants, pubs and a wide array of other leisure facilities have had to shutter operations.
It also faces the problem of its stores only being half-filled due to social distancing requirements. Tesco doesn’t have much capacity to make up for lost sales through its online division, either. It admits that 85% to 90% of all food bought will require a trip to one of its stores.
On top of this, Tesco has had to recruit 45,000 new staff members because of what it describes as a “significant absence” of existing workers. With Covid-19 infections continuing to rise, it looks like the business will have to keep on recruiting too.
Long-term questions
The supermarket’s troubles are deep and numerous. It’s no wonder that it advised today that “it would not be prudent to provide financial guidance for 2020/21.”
Despite its current travails though, could Tesco still be considered a sound long-term buy? Again, food retailing is one of those industries that will be around until the end of days. And as the country’s largest grocer, this Footsie share is in great shape to ride this trend, right?
I’m not convinced. I worry about the impact that rising competition (particularly from the likes of discounters Aldi and Lidl) for its physical stores poses. It’s likely that the fragmentation of the grocery market will begin to grow for its online business too, as new players emerge and existing internet retailers ramp up their operations.
Tesco’s forward P/E ratio of around 12 times makes it cheap on paper. But it’s still a share that carries too much risk for my liking. I’d much rather buy other Footsie-quoted shares instead.
